Cheap delivery pizza; loved for generations by hung over students and lazy corporate workers. But it appears 190 (out of a possible 200) Pizza Hut franchisees don’t love super cheap pizzas and geared up to slice down Yum! Restaurants Australia Pty Ltd (Yum!) after its decision to make a drastic change to Pizza Hut’s range and price point.
After a lengthy trial period, Yum! announced that Pizza Hut’s pizza range would decrease from four to two and the price point for the remaining two ranges would be reduced to $4.95 for “Classics” (previously $9.95) and $8.50 for “Favourites” (previously $11.95). They called it the “Value Strategy”; we call it “desperate for more pizza eaters’ strategy”.
To make matters worse, Dominos then pre-empted the strategy and launched an all day every day $4.95 price point one week before Pizza Hut. Ouch! A class action resulted. The Franchisees argued the Value Strategy amounted to:
- a breach of an “implied term” of the franchise agreements to set profitable prices, which would enable the franchisee to make, maintain or increase their profits;
- a breach of Yum!’s duty of good faith, which extended to obligations to:
- cooperate with the franchisees to achieve the objectives of the franchise agreements;
- comply with reasonable standards of conduct that have regard to the interests of the parties to the franchise agreement;
- unconscionable conduct under the Australian Consumer Law.
Guess what? The Franchisees failed on all grounds. The Federal Court found that franchisors do not have a general obligation to ensure all of its franchisees are profitable after a new product or pricing strategy is introduced. It certainly helped that Yum!’s franchise agreement allowed for it to set prices and implement advertising and promotions without being liable to the franchisee where unsuccessful.
The power balance between franchisors and franchisees remains squarely where it always was. Like the old saying goes, nobody owes you a living even if you did cash in all your super to buy their franchise.