Steak n Shake franchisees protest policy mandating menu prices

A group of Steak n Shake franchisees is contesting a policy change by the chain’s parent company requiring franchise operators to adhere to prices and a promotion schedule.

A five-unit franchisee, Stuller Inc., also has filed a lawsuit against Steak n Shake Operations Inc., arguing that the new pricing policy violates the chain’s uniform franchise offering circular.

The One Voice Franchise Association, or OVFA, which represents more than 50 of Steak n Shake’s 75 franchised branches, said Monday the pricing policy, published last June, differs from the chain’s longstanding setup by which franchisees had some leeway in setting their own prices to account for the needs of their markets. The group also argues that some of the franchisor-mandated promotions are harmful to margins and complicate operations.

Representatives for Biglari Holdings Inc., Steak n Shake’s parent company, declined to comment. San Antonio-based Biglari Holdings operates the majority of the Steak n Shake chain’s 487 locations, though chairman and chief executive Sardar Biglari said in the company’s 2010 annual report that it would look to grow its franchise base by 1,000 units.

Steak n Shake franchisees contend they have the right to opt out of franchisor-mandated pricing or promotions according to the uniform franchise offering circular, or UFOC, that governs many of their existing franchise agreements. That UFOC states, according to documents filed with Stuller Inc.’s lawsuit, that “franchisees are free to set consumer prices different from prices on [Steak N Shake]-owned restaurant menus, and several do so.”

Gary Reinwald, president of the OVFA, said Monday that Biglari Holdings sent letters in August asking franchisees to amend their agreements to include the policy and offered extra marketing dollars as an incentive for compliance. However, no franchisees took the company up on its offer at that time, and Reinwald said Biglari Holdings then made the policy mandatory and threatened default on any noncompliant franchisee.

Faced with default, the members of OVFA adopted Steak N Shake’s prices and promotions. The only franchisee that did not, Springfield, Ill.-based Stuller Inc., filed suit Nov. 18 in U.S. District Court, seeking an injunction from default and a summary judgment that Steak n Shake cannot impose the pricing policy under the current UFOC governing agreements.

Reinwald said that franchisees agree with some of the value promotions implemented by Biglari Holdings’ management, which took over operations in 2009. He said franchisees supported deals like 4 Meals Under $4, a half-price “happy hour” in the afternoons for milk shakes, and a “Kids Eat Free” promotion on weekends.

Biglari Holdings said in its 2010 annual report that Steak n Shake’s same-store sales rose 6.8 percent in the fourth quarter, the first period in which Steak n Shake’s new pricing policy was in place full time. Guest traffic was up 8.6 percent in the fourth quarter. The company reported first quarter results Friday that included a 2.1-percent increase in same-store sales at Steak n Shake and a 3.5-percent rise in traffic.

“The value is in the promotions that we’ve supported, the 4 Meals Under $4 and half-price shakes in the afternoon — huge game changers; they work,” Reinwald said. “When we went with those, our customer counts jumped and so did Steak n Shake [corporate units’], but it’s everything else that hasn’t amounted to anything.”

Franchisees specifically take issue with a $1 price point for sweet tea, offering a free souvenir glass with every $15 spent and a “pizza industry-style” effort to push coupons 52 weeks a year, Reinwald said. Such promotions have resulted in “a number of franchisees struggling with very thin margins and overcomplicated operations, which hinders service,” he said.

Stuller Inc. alleged in its lawsuit that such initiatives would force it out of business within a year. The franchisee calculated that pricing its menu in compliance with Biglari Holdings’ mandate would reduce its bottom line by $57,000 a month.

Steak n Shake said in an Aug. 11, 2010, letter to franchisee Wilma Stuller that “the purpose of the pricing/promotion policy is to ensure consistency across the system and emphasize our mission of providing the lowest possible prices to our guests.”

Reinwald responded Aug. 16 on behalf of OVFA, in a letter written to Biglari Holdings’ chairman and chief executive Sardar Biglari, stating: “These changes would substantially reduce the franchisees’ revenue margins, requiring certain franchisees to operate at a financial loss. Additionally, promotions are not vetted internally, and lack supporting market data.”

Since the OVFA requested an audience with Biglari in Reinwald’s letter written Aug. 16, the chairman of Biglari Holdings has had “zero communication” with the franchisees, Reinwald said.

“We just want a good relationship,” he said. “Many of us have our life savings in this, and we can’t afford to fail.”

Biglari Holdings reported first quarter results Friday that included a 73-percent jump in net income driven by investment gains. The company posted net income of $9.5 million, or $7.08 per share, for the Dec. 22-ended quarter, compared with year-ago earnings of $5.5 million, or $3.82 per share.

The company’s first-quarter restaurant revenue rose 4.2 percent to $155.6 million, reflecting its acquisition of Western Sizzlin Corp. last March and increased same-store sales at Steak n Shake.

Contact Mark Brandau at [email protected] [3].