BK Franchisees Lose Sleep Over Late-Night Rule

Operators Upset With Corporate Mandate to Remain Open Until 2 A.M.

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CHICAGO (AdAge.com) -- How would you like to be behind the counter at a Burger King at 2 a.m. in a high-crime area -- or one near boisterous bars at closing time?
Diddy directive: This Spike Lee-directed spot touts BK's late-night mandate.
Diddy directive: This Spike Lee-directed spot touts BK's late-night mandate.

The idea doesn't appeal to many people, which is why the fast feeder is embroiled in a late-night fight with franchisees over the company's mandate that all its restaurants stay open until 2 a.m. -- during those wee hours that account for a growing 2.4% of fast-food-industry traffic.

Three Miami operators started a revolt last month in a lawsuit that alleges the extended hours, which Burger King is pushing with a splashy ad campaign directed by Spike Lee and starring Sean Combs, don't make money and overtax the work force. While the suit encompasses only 57 locations, it has drawn the support of the company's franchise association, which represents 5,000 of Burger King's 7,000 U.S. locations.

"Nationwide, franchisees have advised our franchisor that serious safety, security and financial concerns surround the company's extended-hours initiative," Joseph Anghelone, chairman of the National Franchise Association, said in a statement. "Many franchisees are implementing this new initiative, although their compliance should not be construed as acceptance of this policy."

Burger King maintains it has right to enforce hours of operation by way of a clause in the franchise agreement, stating that hours of operation are 7 a.m. to 11 p.m., "unless otherwise authorized or directed." "As a matter of fact, 95% of our largest competitors' restaurants operate some form of extended hours, with 42% of their restaurants open 24 hours a day seven days a week," said Burger King spokeswoman Denise Wilson. "These extended hours will enable us to effectively compete."

Escape clause
An executive familiar with the matter said Burger King is offering exemptions on the late-night mandate to franchisees who can demonstrate competitors within a mile radius aren't open during those hours. While applications have been filed, the executive said it's too soon to know if they've been granted.

As the last major player to join the late-night crowd, Burger King has gone a few steps farther than rivals McDonald's, Wendy's and Taco Bell, by mandating -- rather than strongly suggesting -- that stores stay open past 11 p.m. Thursday through Saturday. The chain has also bankrolled the national broadcast TV spots with Mr. Combs from Crispin Porter & Bogusky, Miami.

The company declined to comment on its late-night media spending. But it's clearly expecting to reap financial rewards from insomniacs and post-partiers with the munchies. Russ Klein, Burger King's president-global marketing strategy and innovation, told investors in May that its late-night hours, which started in June, and breakfast value offerings are expected to boost same-store sales by a full percentage point over the summer.

The late-night concept is still in the nascent stages. According to NPD Group, the 11 p.m. to 2 a.m. window accounts for 2.4% of traffic in the quick-service industry. That's up from 1.4% a year ago, because more stores are staying open.

Darren Tristano, exec VP at Technomic, estimated that late-night transactions account for less than 10% of quick-service sales, although he stressed that the business "can be profitable" because most overhead costs are already covered.

Overworked workers
But franchisees, already beset with rising commodity costs, gas surcharges, minimum-wage increases and more-cautious consumers, are having trouble keeping workers in the restaurant overnight. Many have multiple jobs and rely on the late-night hours to catch a few winks before a morning shift somewhere else.

Security is another concern. Chris Ondrula, chief operating officer of Spence Group Services, said robbery and violent crime has happened only late at night or early in the morning at his company's 58 Burger King locations in Illinois, Ohio and Pennsylvania. The company closed a restaurant in Lindenhurst, Ill., six months after an employee was murdered in November 2006. Sales at the location never recovered.

Mr. Ondrula said while his company is particularly sensitive to security issues, "being open hours that are not financially viable is something that we are keenly aware of." He added that some of his company's locations had been successful in the late-night hours, even before the mandate, while others had not.

Roger Webb, a Wendy's franchisee in Florida, said late night probably isn't a concept that would make sense across the board for the chain. "It may work in some urban areas, but when you start getting into Middle America, there's not much traffic out there at three in the morning."

Burger King could face liability issues in the event of a violent crime during late-night hours, said attorney Rich Reinis of Steptoe & Johnson, but exposure would vary by state. He added that an indemnity clause in franchise agreements generally exonerates the franchisor.

This is the fast feeder's second legal fight with franchisees this year. Luan and Elizabeth Sadik charged that Burger King's value menu, particularly the double cheeseburger, had driven them to insolvency. The Sadiks lost their case, but Burger King quietly terminated its test of the item at $1.
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