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Details?

how?

Paul, you obviously know

Paul, you obviously know nothing of the back story in play here. I do, unfortunatley. "Kickbacks", no, but there are many other "legal ways" the francisor stands to gain as it pertains to this dispute.

KFC franchisees win

A Delaware-based law firm Potter, Anderson & Corroon LLP today (Feb 14, 2011) publish their summary of the KFC franchisees win.

In this post-trial opinion interpreting ambiguous terms of a certificate of incorporation, Vice Chancellor Strine considered extrinsic evidence of the parties’ negotiations over the certificate’s language and course of dealing, and applied the interpretive principle disfavoring disfranchisement, to hold that the certificate of incorporation did not grant the defendant the right to veto certain corporate acts approved by the corporation’s governing body.

...The court held that the franchisees‘ reading of the certificate was the more reasonable, and that the certificate did not grant KFCC a veto right over recommendations approved by a majority of the Committee. - Lexology

michael webster's picture

Chicken

Guest writes: 

"Hey, Webster has a point. Rather than figure out and enforce the contract, the judge should have designed a management structure that better facilitates marketing."

Another Guest writes:

"The role of judges is not to reform or reinterpret contracts."

Both of these guests are correct - a new management structure that faciliates the KFC marketing is needed, but it is not the role of a Judge to construct this structure. 

From a strategic point of view, the current structure sets up, reinforces the participants viewing their interaction as a game of chicken - both sides have to commit to unswerving loyalty to their own version of the brand.  The resulting crash served no one, and as John Gordon has pointed out: further infighting is likely.

Before both parties rush back to counsel, for advice on the rematch, I suggest that they step back and conduct a simplified simulation, or role-play, of how they got to their death match.  Otherwise, the parties will find themselves trapped in spiral of conflict.

There are a number of providers which can construct, create, and teach these simulations - a much better use of the ad funds than going to the Delaware Court.

Re: No conspiracy by KFC franchisor

Paul puts the KFC strategy into perspective. Not everything a franchisor does is meant to somehow shorthand and/or swindle the franchisee. As the market evolves, so must the franchised brand.

"Kentucky Fried Chicken" was recognized by its loyal "fried" chicken consumer base as "KFC" long before the franchisor took advantage of the evolving consumer preference for a healthier alternative. Dropping the "fried", meant less association with their products being "fried". The timing may have been coincidental to competitors, such as, Boston "Chicken"/"Market" and Kenny Rogers Roasters, coming to market.

Many loyal Dunkin' Donuts consumers refer to the brand as "DD". Due to the evolving consumer brand recognition, the new Dunkin' image incorporates "DD" into the brand's identity. Makes sense to keep up with the times; especially, for mature franchised brands like "KFC" and "DD".

John Gordon's picture

KFC Dispute: Next Steps and A Way Forward

We agree with Michael and Paul that further infighting is likely. While it was appropriate to see the Vice Chancellor enjoin KFC from "going dark" (and walking away with the marketing ad fund contributions) the essential issue remains.

KFC/ US store EBITDA margins and same store sales have been falling for some time. We understand that the US KFC same store sales decline bottomed out last quarter but that hardly fixes the US brand.

YUM is absolutely China and Internationally focused and made no comments on US KFC business last week during iots earnings call. That shows their focus.

We think many of the older QSR chains get trapped into a "one size fits all " approach, largely driven by Chief Marketing Officers  (and their ad agencies) with their desire for a single product and single print point on TV. That then leads to the "all fried " versus "all grilled" conflict.

In our work and projects, simply put, we see both "fried chicken stores" and "grilled" stores within the system.  Different locations, demographics, traffic patterns and the like. YUM/KFC, with all their G&A and talent, can come up with variable menus, store designs, pricing and marketing strategies that  work in both type of stores.    

Paul Steinberg's picture

No conspiracy by KFC franchisor

"Granville Bean" is correct. This has nothing to do with what is more profitable for the franchisor.

In fact, KFC used to be called "Kentucky Fried Chicken" and changed to downplay the "fried" aspect of the cooking. This goes way back to the time that Boston Chicken (which later became Boston Market) was successful in pitching the rotisserie chicken as a healthy and upscale alternative to fried chicken.

KFC has a tired brand and the market for fried chicken skews downscale. To recapture the moms who won't take their kids to a "fried food" place, the franchisor needs to change its image.

You may disagree with the franchisor's logic and/or advertising strategy, but this has nothing to do with any vendor kickbacks. (Or as Robert Zarco would call kickbacks: "vendor gratuities fully disclosed in the offering circular and therefore not illegal or improper.")

Ray Borradale's picture

yes, yes, censorhsip yes

on the left those who agree - on the right those with a brain

Granville_Bean's picture

BMM should disallow "Guest" postings

"Makes me wonder if the Franchisor makes a greater "rebate" on the sale of it's grilled chicken to the franchisee "

And sometimes a cigar is just a cigar.

Don Sniegowski's picture

More franchisee influence at KFC?

Delaware Court's vice-chancellor Strine gives this description in his opinion memorandum (pdf) of where franchisor KFC Corp plans to go—less operating and more franchising.

in the nation relevant to this case, the United States, KFCC does business mainly as a franchisor, operating only about 900 of its approximately 5,100 domestic locations, with the remaining 4,200 operated by 650 franchisees. KFCC is planning to further reduce the number of U.S. stores that it owns, planning on owning only about 250 stores ultimately.

That implies that the franchisee bodies of AKFCF and the NCAC should grow in importance as the number of franchises grow and KFCC's restaurants shrink.

Is this only about a change

Is this only about a change in marketing direction?
Big advertising fund.
Rebate question.
China.

Mr. Blue MauMau's picture

KFC's secret ingredient: it's franchisees

The secret of KFC's success is not the secret herbs and spices that cover its chicken, although those are lip-smacking good. It's not the size of the chain, although it is huge...

  • Read the rest of this comment here. It has been converted into an Op-Ed column.
  • Responses to this comment have been placed here under the new Op-Ed piece.

KFC Stakeholders?

1) To the publically traded Franchisor, stakeholders do not matter only "shareholders" do. What is a Stakeholder?
2) KFC is pushing a product that changes the core franchise offering which is traditional Fried Chicken. Makes me wonder if the Franchisor makes a greater "rebate" on the sale of it's grilled chicken to the franchisee versus the chicken pieces & fried chicken batter mix, which I would assume includes more franchisee prep time at the store level, and is probably more profitable to "we" - the franchisee.
3) Better question would be, who paid for the lawsuit? The Franchisees? Through their Ad Fund and at the their National Council level?

Regarding #3, if the franchisees paid on both ends, the shareholders should be happy since it'll probably encourage people reading about this matter in the media to visit a KFC and purchase both products to sample. Although I'm a huge fan of fried chicken, I have never tried KFC's grilled chicken offering. Hell, it'll be lunchtime in couple of hours, and I've got this chicken "itch" on my mind... Maybe my purchase contribute towards the momentum going into KFC's next earnings call?

Is NCAC incompetent in its

Is NCAC incompetent in its role guiding the interests of all stakeholders?

Does KFCC have an ulterior motive to market to the detriment of franchisees?

If 1 and 2 are false why is this destined to another brawl to the detriment of all stakeholders?

Nothing here clarifies what are the real issues.

re: Judge needs to ignore agreement and start reorganizing

The role of judges is not to reform or reinterpret contracts.

Judge needs to ignore agreement and start reorganizing

Hey, Webster has a point. Rather than figure out and enforce the contract, the judge should have designed a management structure that better facilitates marketing.

Since he's already leaned towards the franchisees, the judge might as well dive in and re-organize the whole kit and caboodle. The national ad agency should come under the management of the NCAC. Forget the redundancies between KFC and NCAC. The NCAC would hire professional managers and have these executives oversee the complete advertising process.

michael webster's picture

The Chicken Fight

People have to read this decision, which satisfied neither party and will likely lead to further infighting between the Franchisee's Advertising Co-op, NCAC, and the Franchisor, KFCC, understanding the procedure by which advertising gets approved.

If the franchisor, KFCC, brings a marketing campaign to the franchisee advertising co-op, NCAC, that the NCAC doesn't approve of, then there still is a stalemate - KFCC can continue to refuse to implement the changes NCAC recommends as long as KFCC claims that it is acting in good faith and in the best interests of the brand.

Although Judge Strine's folksy ruling will appeal to some,  especially his acute observations regarding the proliferation of the NCAC sub-comittees, the fundamental problem remains: the procedure by which KFCC brings advertising campaigns to the NCAC is flawed.  It is heavily rules oriented, and not designed to bring about the necessary concensus in the  face of entrenched positions.

This is not a litigation problem -it is procedural problem.  Both parties have wasted millions of dollars on trial lawyers to arrive at a result which settles nothing.  The NCAC gets its input into the advertising process, which KFCC need not take as long as it claims that is acting in good faith to protect the brand.

Don Sniegowski's picture

Quotes about NCAC v KFC from Judge Strine

The Delaware judge has some great quotes in his 65 page opinion memorandum (pdf). Here are a few that stand out:.

In regard to franchising, it is not just about a franchisor collecting fees from franchisees, but also with the relationship comes heavy obligations by a franchisor. The judge also provides this reminder of the need of franchisees to protect themselves, like KFC franchisees have done. Strine observes:

But with the risk-reduction and flexibility that comes with franchising come burdens.  Because franchisees make important, long-lasting investments of their own, they also seek contractual protections of their own.

In regard to the franchisor versus franchisee relationship, there is a desire to manage by my way or the highway, despite what the agreement says. The judge says:

I note that KFCC’s view of how the NCAC should operate is a highly formal one. KFCC as an entity proposes and the NCAC Committee disposes.

Vice-Chancellor Strine notes later that not only the agreement but also past history of this system prevent such a one-sided relationship.

In regard to the difficulty of navigating through the NCAC Certificate (the agreement for the franchisee cooperative):

although the parol evidence is itself more Mississippi mud brown than Menemsha blue in clarity, that evidence on balance supports the franchisees’ position.  The NCAC has never functioned in the rigid manner that KFCC advocates, and the NCAC Committee has on several occasions modified KFCC proposals over KFCC’s objections.

This is colorful language from a court. I mean, "more Mississippi mud brown than Menemsha blue?" Menemsha? Gotta remember that.

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