Franchisees Sue KFC to Retain U.S. Marketing Control
WILMINGTON, Delaware – The KFC National Council and Advertising Cooperative, Inc. (NCAC) filed a lawsuit last week against the world’s most popular fried chicken chain after KFC's corporate office made a number of marketing blunders in promoting a new product, Kentucky Grilled Chicken, without authorization.
The legal action is seeking an injunction to protect US franchisees’ rights in having control over the marketing group, as the company tries to infringe on its authority. Although the complaint is against KFC Corporation, it clearly points the finger at KFC’s newly appointed president Roger Eaton for his aggressive tactics against council members. The complaint states, “After operating smoothly and successfully under NCAC Certificate and Bylaws...for almost twelve years, from 1997 to 2008...NCAC’s working relationship with KFC changed abruptly.” Their primary reason, “...the appointment of a new president...Roger Eaton."
Last May, in an effort to promote the launch of its new grilled chicken products, KFC, under parent company Yum! Brands, announced on the Oprah Winfrey show a free two-piece grilled chicken meal through downloadable coupons. But when the response became too much for the chain, KFC sent letters to franchise owner-operators telling them not to honor the promotion. After angry customers were sent away with rain check coupons in hand, a class action lawsuit was filed in July to hold the chicken chain responsible for the marketing debacle.
According to news reports, that suit resulted after Eaton made a startling admission. The KFC president was widely quoted as saying that despite the huge public outcry over KFC’s refusal to honor its coupons, the promotion had been incredibly lucrative: “There's no one in America right now who doesn't know we're selling grilled chicken.” To add insult to injury, Eaton reportedly bragged to the Associated Press that “the critical thing for us was to get people to eat the chicken, whatever it took.”
The complaint filed in the Chancery Court of Delaware alleges that KFC has recently taken the position that it has the sole authority in making decisions for the NCAC. But that isn’t what the contract says. Although the advertising council originally incorporated in 1969, the current certificate and bylaws of the NCAC were adopted in 1997 after extensive negotiations, in connection with a settlement agreement of various class action litigation against KFC in federal court. KFC was limited in its ability to make marketing decisions, being authorized to mainly hire or fire an advertising agency or a public relations firm. In order to induce franchisees to conduct national advertising and make contribution to the fund, KFC agreed that franchise owners could command the NCAC through a franchisee-controlled board.
The “operational guidelines” through the settlement agreement were adopted for the period of 1997 through 2008. According to the complaint, they remain in effect with the certificate and bylaws as amended through February 2009 with unanimous support from the NCAC Committee, made up of more than two-thirds of franchisee representatives.
The 17-member council consists of 13 franchisee representatives and four KFC corporate officials. The NCAC is operated in one section of Louisville, Kentucky, while the KFC corporate office is in another. Operational guidelines of the National Council clearly demonstrate that there is to be a substantive “give-and-take” process between KFC Corp. and NCAC prior to submission of advertising to the full committee. And it states that the bylaws do not contemplate a dictatorial “take-it-or-leave-it” approach, according to the lawsuit.
But Eaton would like to change that. Under Eaton’s presidency, new changes to NCAC’s structure are being proposed that franchisee members feel will transfer power away from the council franchisees and go to KFC corporate.
Because Eaton does not have the history with NCAC that previous presidents had, having risen through the ranks of KFC International in Australia— where a more traditional organizational structure exists in which franchisees in advisory councils typically vote up or down on the franchisor's marketing initiatives in a consultative capacity. Franchisee members feel he does not have the appreciation for their elected officials and their authority. They state that the president regards franchisee members of the Council as obstacles rather than partners when it comes to control of marketing decisions and funds.
In addition to the legal constraints that the contract puts on KFC, members feel that Eaton’s contempt of the NCAC structure, along with his aggressive position that KFC’s future lies with grilled chicken rather than fried, is a disastrous recipe from a marketing perspective. KFC’s recent media and advertising proposals to the marketing council have been heavily, if not exclusively, lopsided towards grilled.
Last December KFC wrote a stern letter to council members, advising them that corporate had the sole authority to make recommendations and the right to make changes as reflected in the organizing documents of the NCAC. “It cannot be trumped by the exercise of a majority vote of the Committee,” it declares. It states that KFC will reject any illegal use of majority power and “will oppose by all necessary means under Delaware law any attempts to disrupt the allocation of responsibilities set forth in the organizing documents of NCAC.”
NCAC’s counsel shot back reaffirming that KFC’s position is contrary to the bylaws and certificate of the council that has been negotiated and signed by KFC. The franchisor does not have the “sole authority” to act regarding marketing and advertising. They can only recommend to the Council. The letter also stresses that the NCAC Committee has always acted in good faith. They asked that KFC do so as well. “To that end, we ask that KFC cease and desist from attempting to stop the Committee [NCAC] members from exercising their fiduciary duties, and work collaboratively with the NCAC . . . in the best interest of NCAC and all of its members.”
In its petition motion to expedite, also filed on January 7, NCAC pleads with the court to schedule the trial by mid-March, 2010. It explains that the 2010 media and advertising calendars must be approved by the NCAC by the end of March in order for advertisements to be prepared and ready for approval and airing in May 2010. If it is not resolved by then, they declare the NCAC will be irreparably harmed.
The council members also claim that KFC is taking retaliatory measures against franchisee members for having the temerity to oppose Eaton’s will. It adds, “. . . including threatening those members with personal liability for exercising their votes as Committee members of NCAC, launching arbitrary audits of their stores and threatening to defranchise them.”
In an effort to get comments from those on both sides of the issue, numerous phone calls were made to litigants and their attorneys.
Jonathan Blum, Yum! Brands senior vice president of public affairs stated, "This is a baseless lawsuit over a U.S. franchise contract. YUM Brands fully expects to win the suit and minimize the waste of time and money spent on it so that we can continue to satisfy our customers and grow the business.
We have a tremendous leadership team driving the major changes needed to turnaround KFC in the U.S., including last year's successful introduction of Kentucky Grilled Chicken, which will generate nearly $1 billion in sales in its first year."
Allan Forsythe, executive director of the KFC National Council and Advertising Cooperative, would only say, “This is a pending litigation matter and we do not wish to comment at this time.”
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Related Articles:
- KFC Brand Change to Grilled Ignites Lawsuit from Franchisees
- KFC Sued Over Fraudulent 'Chicken' Giveaway - PRNewsChannel.com
- CORRECTED-KFC amends free chicken deal after Oprah promo
- Australian Government Upset over Yum's "Unfair" Franchise Practices
- Australian KFC Franchisee Forced to Close Doors
- Australian KFC Franchisees Seek New Laws on Unfair Non-Renewals
| Attachment | Size |
|---|---|
| KFC-(stamped) Complaint pkg 010710.pdf | 3.95 MB |
| KFC-(stamped) Plt Motion to Expedite pkg 010710.pdf | 2.13 MB |
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The narrow contractural dispute is who gets to appove & fund advertising. And this is being used as a proxy over who gets to control the direction of the brand?
Mr. Bean isn't quite right in saying franchisees only approve and fund advertising. That makes it sound like franchisees are an advisory board to approve and fund marketing plans that KFC decides.
It is the other way around. It is KFC Corp who acts in an advisory position.
According to Section 3.1, the NCAC "design, plan, administer, implement, promote and supervise... advertising and marketing programs relating to 'Kentucky Fried Chicken' and related products" (NCAC's Restated Certificate of Incorporation, pg. 3)
Nonetheless, Granville Bean asks a good question. Even if franchisees control the funding, design, planning, administration, and implementation of marketing and advertisement of KFC products, that does not equate to control of the brand.
Sounds like alota trouble over TWO Free pieces of chicken...
They HAD to go grilled..... Their fried customers were gettin so fat they couldn't get into their cars to buy more chicken...
Just give the customers "free" chicken, and pay the franchise fee with the coupons cust6mers submitted... Hey, Thanks ALOT..!!!
problem is that fried chicken is so damn good that we eat it till we bust. Being a Suthroner meself, fried chicken is my national dish. BBQ is second and in a huge tie for third is anything Belinda wants me to cook for her at dinner time. She lets me git fried chicken brought in for lunch about once a month, and I eat about ten pieces with abour three beers and don't dare bill anyone for anything the rest of the day.
I like grilt chicken too. I like it a whole lot. Hell, I like chicken and even girls who taste like chicken. Askk around if you have any doubts. Next I like PORK aka PIGS - all forms, shapes and cooked every which kinda way. I like girls who taste like pork too. Asj around if you have any doubts.
KFC aint got nuttin to worry about no how. Everybody loves their food. I even eat it in the car on trips. Try that instead of texting. Pull up to the window and git yo ownself a box with about ten pieces, and go git yo self a quart of cold beer and you don't even care that you have a long way to go. Sure, some of that grease is gonna drool down the front of yo clothes - so what. Change when you git to where you are going. A man with fried chicken grease on his clothes can easily introduce his own self to most girls in the south. A bucket of fried chicken shared with a southren girl in bed with some cold beer will lead faster to marriage than jewelry if folks have their heads on straight.
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
Many moving pieces here. One interesting note is KFC did not get a long lasting incremental comp store sales boost out of the Grilled product rollout last year. They did get about a 6 week pop starting in May 2009. Perhaps that relates to advertising budget, weights, duration of focus and diverse marketing tool focus.
John A. Gordon Chain Restaurant Earnings and Economics Experts www.pacificmanagementconsultinggroup.com
I cannot resist this: KFC is playing a game of chicken with their franchisees - approve the advertising for the grilled product or we won't produce any advertising for your approval.
My bet is that the litigation won't produce a declaration one way or another.
Is there a mediator in the house?
Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"
to select advert mix (tv versus coupon etc), or is it the right to determine whether the franchisor can or cannot introduce and adopt new product/service concepts and advert them - change the direction or the diversification of the franchise identity itself?
It appears that this fight - possibly due to personalities/ego issues - is getting beyong what it needs to be to enable rational sorting out of who can do what, with which and to whom.
KFC franchisees have an incredibly positive history, and Andy Selden is about as good a franchisee lawyer as it gets. I know Andy well, and I expect that he will get this sorted out properly short of having to have a court make the ultimate decisions.
It doesn't seem to me like a question of whether grilled chicken is right or wrong - whatever that is. The franchisor has the right to determine the configuration of the franchise in this context. That's why the suit doesn't make a lot of sense to me - aside from the fact that I don't know all the facts. Franchisee association history usually will not expand franchisee rights as a matter of the legalistics.
Could it be so simply as uppidy management versus uppidy franchisees?
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
Richard,
This is franchise litigation, which is your area of expertise. Don't speculate about personality clashes. That's not your area of strength. Besides, there are more than enough pop psychologists who can conjecture about that topic.
Instead, counselor, tell us about the realities of the law. What part of the contract has been breached, if any, and what are the legal precedences that the courts will probably rely on as they adjucticate this?
You say, "The franchisor has the right to determine the configuration of the franchise in this context (the mix of chicken product, which is a typical marketing function)." What are you basing this conclusion on? Can you cite the part of the agreement that shows this?
What a load of rubbish this KFC dispute is. Franchising is not about democracy - never has been - never will be. Although franchisees opinions and ideas should not be overlooked, this should never translate into a case of the tail wagging the dog.
There's no doubt that the KFC franchisees are trying to finger the franchisor for control over the direction of a brand that they do not "own". Interesting? These sort of people are just as likely to go to a restaurant and not like the decor - form a committee and then start lobying the owner to paint the walls a different colour! Sounds ridiculous, right?
Not all decisions of a Franchisor are popular or right. Leadership is not a popularity contest. It never ceases to amaze me to see how many brand experts come out of the wordwork after owning a franchised business for 12 months. If franchisees just focused more on making sure their stores were operated in accordance with the System and their customers were happy and satisfied rather than being disruptive to the System they have invested in, everyone would be happy.
I seriously wonder sometimes whether franchisees understand the business they are investing in. Too many franchisees I believe think they have bought a business in the same way a Lessee enters into a lease and then considers themselves the owner of the building.
I'm sure there are hundreds of tree hugging Franchise Consultants out there who after reading this will want to advocate the virtues of the interdependence of the franchise relationship where franchisors should sing kumbaya with their franchisees on every frigging aspect of the business. Meanwhile, the competition has streaked ahead with strong leadership whilst the tree hugging franchise is making sure everyone is happy and feels connected.
Lastly, if any Franchisee wants to control the direction of the Franchisor business, then sell their business and apply for the CEO position.
Thanks.
Guest - "I seriously wonder sometimes whether franchisees understand the business they are investing in."
I have the same thoughts. I seriously wonder sometimes whether franchisors and their executives understand the business they are managing and the complexities of franchising.
Franchisors like this don't like that the people who work this business day in and out and invest in this business have a say in the business. May be this CEO should go ahead and buy up a majority of the stores if he is so confident in all his plans. My bet is he's much, much more confident when he's using other peoples money. These high level corporate desk jockeys are all the same. To much salary, based on school not enough real hard work and or personal risk. My bet is he never made a chicken sandwich for a customer ever. He wants to destroy what he did not build. Fight hard franchisees.
The antidisestablishmentarian guest knows how to stop shop talk more efficiently than sealing desk jockey CEO lips with gorilla glue on duct tape.
Your or this conversation is about how long standing agreements are brushed aside due to a franchisors obvious greed. This is more then just idle "shop talk" to many. It hits nerves. It is there (the franchisees) livlihood being warped and manipulated. it is there long standing investment of blood sweat and tears day in and day out. It's so disgusting how these corporate types operate with impunity from some useless ass kissing office and are allowed to override real investors. I hope to god they fail in this case and the franchisees prevail. BTW Nothing is more annoying then cocky psydo intellectuals.
...for those corporate types who operate with impunity from some useless ass kissing office you'd have had nothing to invest in.
Those "cocky pseudo intellectuals" (spelled pseudo, not psydo), in conjunction with franchisee marketeers who participate, develop regional and national programs that help to sustain franchisee businesses. While it's true that not every program or roll-out garners the fancy of the entire "system" think back to those that were wholeheartedly endorsed by all.
Go ahead and compromise the integrity of your business equity and watch the value of your business plummet while you can exclaim that you "won" in a courtroom.
1st of all the desk jockeys usually are not around long enough to have CREATED anything worthwhile.
What a joke, "Develop regional and national programs that help to sustain franchisee businesses. While it's true that not every program or roll-out garners the fancy of the entire "system" think back to those that were wholeheartedly endorsed by all. so funny,
Been in it for a decade,
I cant think of one program that helped sustain a f-n telphone bill. But plenty of them put money in there pockets.
Can't think of any that were endorsed by all. May be forced but not endorsed. I can't think of one that was designed for the benefit of the network and for not topline franchisor profit.
...you sell your business. Clearly, to remain in a system for which you have no faith has, for a decade, compromised your ability to think positively.
Typical franchise responses such as "top-line franchisor profit" and "forced but not endorsed" have always led me to believe that the best years of commitment to the system you've franchised from are behind you.
The old "walk a mile in my shoes" line, another typical response from Franchisee's who now dedicate themselves to complaining rather than actually managing their businesses, forget that they originally purchased those "shoes" from the Franchisor with the knowledge, expertise, system, model, and everything else that allowed them to get into business in the first place.
Here's a thought...try replacing your sign with "Guest's Fried and Grilled Chicken" and then let us know how you make out. I can assure you, Colonial Sander's you're not and good luck with that.
"Guest writes: Here's a thought...try replacing your sign with "Guest's Fried and Grilled Chicken" and then let us know how you make out."
Speaking of which, did you know that this chicken chain's first franchisee, Pete Harman, was the person who came up with and hung the signage Kentucky Fried Chicken? He thought Kentucky sounded friendlier than Sander's Cafe, or the briefly thought than dropped Utah Fried Chicken.
Harman says that the name Kentucky Fried Chicken was a hit from the get-go.
...Jim Delligatti, an early franchisee of McDonald's, first invented the Big Mac?
What's your point? Franchisees have always added and contributed, positively, to the systems that gave them their start.
I believe the point was that a large number of the franchisees were her way before the current crop of "desk Jockeys".
Quite a few quick service restaurants have been dropping in same store sales in 2009. KFC owners are also feeling the recent softening of consumers who dine out.
Wikinvest says that KFC: "In the US, KFC has a 46% market share in the chicken QSR segment, close to four times higher than the next competitor."
There are no brands in the burger world that approach a 50% market share that KFC has in chicken. McDonald's can only wish for such a huge share. It is phenomenal. KFC operates in over 100 countries with a total of 14,248 restaurants worldwide.
The 2009 annual report is due in February. But since the marketing problem sees its split between franchisor and franchisees in 2009, it might be best to compare same store sales from 2008 and before with its competitors to get an insight into the strengths of its franchisees' marketing know-how.
Domestically, it hasn't been an easy path. It would be an interesting story to see how franchisees have adjusted marketing to get around the impediments.
Franchising and democracy aren't necessarily mutually exclusive. In this case the Guest is right. The marketing of the KFC brand is not a democracy.
In the KFC system, it is a republic.
Franchisees elect 14 representatives. And KFC elects 4 to the NCAC. Those representatives have control of the marketing agenda that thousands of franchise owners and a few franchisor workers must adhere to and that are contractually binding.
As the guest points out, leadership is not a popularity contest. What the Council says, goes.
It's an interesting governance tool adapted to organize equal owner-operators who have pretty much equal contractual franchise rights. I'm not sure that a democracy would work. I'm not certain that corporate management principles work particularly well when it comes to flat structures of business owners.
I leave those deep things to business and governance scholars to investigate.
But what surprises me is that for decades, one of the world's most powerful marketers has used a republic form of organizational governance to tap into its deep talent of owner-operators, a talent pool that is much wider and deeper than anything Yum Brands, Inc. or KFC Corp. could ever have.
Few would doubt that the outcome of this organization has been spectacular.
Likewise, if any franchisor employees, including its CEO, want more control of the brand's marketing efforts (other than the 4), let them become an owner to be appointed to the Council. Get in line.
The fact is that KFCC is unloading there restaurats at a breakkneck pace. They would love to see many current franchisees go belly up so they can sell the markets to new franchisees at a much greater royalty percentage. JMHO
that franchisees had negotiated a level of democracy and the franchisor conceded, at least at some tme, there was value to the brand in doing so.
That being said; there is a whole lot of truth in what you say. If the franchise is not a scam then franchisees should back their brand and its leader [as a general rule].
I agree with Darnelle; this will be a great case study.
Australian Franchise Opportunities, a common sense approach to franchising
Solomon: "is it the right to determine whether the franchisor can or cannot introduce and adopt new product/service concepts and advert them - change the direction or the diversification of the franchise identity itself?"
Correct. The franchisees via the Council essentially have the right. The franchisor does not.
My understanding from the attached documents is that it would be virtually impossible for KFC to change from Kentucky Fried Chicken to Kentucky Grilled Chicken without approval and support from the Ad Council. The franchisee council has sole authority in creating, deciding and implementing product/service advertisements. Essentially, that gives it the authority to change direction of the brand identity itself via marketing promotional activities. With only four seats on the Council, the franchisor has for years acted effectively in an advisory role to franchisees.
How do you understand the attached legal documents?
The bylaws of Advertising Co-op state that for any new, major campaign KFC Corporation will send the storybooks to all committee members for the input and approval only, section 4.2(f).
It seems a thin contractual reed to hang ones hat on, but the declaratory remedy sought also seems on overreach.
How did the discussion about a switch from fried to grilled ever get this far without their being substantive agreement on how to go forward, I wonder?
Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"
"The franchisee council has sole authority in creating, deciding and implementing product/service advertisements."
Don't forget to add to that list FUNDING. The mainly franchisee consitituted council decides on how to spend the ad fees collected from KFC franchisees.
This maneuver by Eaton is about a hungry franchisor that wants to change the status quo during tough times so that it can soon have access and control of franchise ad fees.
Solomon: "Could it be so simply as uppidy management versus uppidy franchisees?"
If you were a franchisee and received the bulk of your sales through fried chicken, would you be uppidy if Kentucky Fried Chicken changed the brand to Kentucky Grilled Chicken?
Now imagine a group of franchisees that have contractual authority obtained through years of hard-won negotiation and litigation that allows them to pooh-pah such franchisor activity. But the franchisor's new CEO is ignoring it in his efforts to kill the goose that laid the golden egg (fried, in this case).
Is your blood boiling and are you uppidy yet?
adding GC to the concept but keeping the name of the franchise KFC?
Guest's post abover sorta convinces me that I am probably on the right track - especially with the post by my brother Michael Webster.
The right to approve adverts is probably not the right to determine the configuration of the franchise model - and I concur in Webster's question.
You see I know Andy Selden well, and this does not appear to have his finger prints on it. He is a man of consumate reasonableness and intellect - and he is absolutely charming to boot. If anyone can get people together, it is Andy.
However, Andy and YUM (tka Pepsico Inc)do have some hot history when it comes to a change in the law of franchising in the state of Iowa some years back. One would think that YUM might be too mature to be still gnawing on that old bone - but ya never know.
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
This isn't about adding grilled chicken vs. fried chicken, of adding grilled to the menu for additional revenue. That is welcome by franchisees, NCAC and KFC. The more sales with good margins, the better.
This isn't about being uppidy or franchisees being offended that the new CEO wasn't nice enough to them.
I see it. Is this fight over y'all being mad about who gets to say a blessing over chicken advert copy (which seems to be what y'all have the right to do - in an advisory capacity), or is this a fight over the decisioh to heavy up on GC adverts (which may not be y'alls' prerogative)?
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
Here is some very important background history from the Independent Franchisee Associations' website:
http://viewer.zmags.com/publication/8170b178#/8170b178/45
Well worth the read.
Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"
Unlike this example, modern franchising is all about control of the brand, its retail units, and in short, its message. Units need to act in standardized unison. I say this decentralized system never will amount to much because the franchisor hasn't done its job.
Oh. Its KFC, you say? I didn't see that. Who could have predicted that this loose confederation of restaurant owners would rise to the top? That their innovations would come from individual franchisees and be spread about by them? Who would have thought that franchisees could control the national marketing and brand messaging, while being so good at it?
KFC would make a fascinating business case study to expose students to franchising management, which shouldn't be confused with what is taught in B-School.
Stick to your guns. Face them down, "Don't be chicken". Eaton sounds like a real ego maniac. Where on earth do these guys come from? Some facist corporate training camp.
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