Despite its resilience, the franchise industry is still susceptible to inflation. With increased spending on goods and labor, some franchises are subtly boosting their prices and passing costs on to customers.
This is common for restaurant franchises. It was reported that in the first quarter of 2022 McDonald’s increased its U.S. pricing by roughly 8%, compounding a 6% price-bump in menu prices in 2021. Additionally, Business Insider reported in July that many McDonald’s franchisees were ditching some of the pricing models – with one such casualty being the $1 drink – for more cost-efficient offerings. These reports are interesting particularly as McDonald’s is an industry trendsetter.
When asked about pricing and the removal of $1 drinks from the menu, the comment to Business Insider by McDonald’s corporate office was particularly revealing: “Franchisees set prices and have the flexibility to create promotions that will drive demand locally.”
This makes me think of the question I’m often asked: “Who sets the prices for goods and services sold by franchisees – the franchisor or the franchisee?”
The answer, as is common in legal scenarios, is: “That depends.”
The ability to control a franchisee’s pricing is often set forth in the franchise agreement signed by the franchisor and franchisee. Sometimes, the franchisor reserves the right to determine a franchisee’s resale prices. Other times, the franchisee will have ultimate authority over its pricing.
Whether the franchisor has the right to control the franchisee’s prices is an issue that both parties should consider at the outset. The ability of the franchisor to control prices will enable it to, inter alia, guarantee consistency throughout the franchise system. This will better ensure that a customer’s experience will be the same at most locally-based locations.
For the franchisee, depending on the particular territory, the ability to increase (or decrease) prices can be significant. For example, a franchisee with extensive costs of operations in a market such as New York City may need to sell products and services at prices higher than those franchisees operating in a more remote location such as rural Wyoming. This will help the NYC franchisee cover high rent costs and rising employee wages.
To their credit, McDonald’s hands-off approach makes sense, since franchisees operate 95% of its restaurants in the U.S., according to FranchiseWire. And as previously discussed, McDonald’s operators have some leverage in the form of the National Owners Association, an independent association comprised of hundreds of the fast food giant’s franchisees.
If your franchise system does not have this sort of support, you should seek other options to protect yourself regarding pricing before signing the franchise agreement.
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Lusthaus Law P.C. has a proven record of assisting franchisors and franchisees with their business operations at every stage of development. We are committed to our client’s success and keep our finger on the pulse of the industry to ensure that we provide the best and most up-to-date franchise law counsel.
Contact us today to learn more about how Lusthaus Law P.C. can help you navigate a clear path towards your franchise’s successful future.
