No. 1 franchiser sues Wendy's over soda syrup

October 18, 2007|By Dan Thanh Dang | Dan Thanh Dang,Sun reporter

Further chilling already frosty relations, the largest franchisee of Wendy's International Inc. has filed suit against the Ohio corporation once known for its steady management and effective, folksy ad campaigns under founder Dave Thomas.

In its suit, DavCo Acquisition Holding Inc., the Crofton-based owner of 158 Wendy's outlets in Maryland, Washington and Virginia, alleges that the corporation improperly inflated soda syrup prices to divert funds to a national campaign that many franchise owners despise.

In doing so, Wendy's has also denied the franchisee its right under contract to seek open bids from competing soft-drink suppliers, according to the suit, which was filed Tuesday in U.S. District Court in Ohio.

"Our view is that the current Wendy's contract with Coca-Cola far exceeds current market costs for this product," David Norman, executive vice president of DavCo, said yesterday. "It puts our Wendy's and all other Wendy's at a competitive disadvantage."

"Whether or not there is a benefit to Wendy's above the face of the contract, that's something we're asking the court to let us find out," he said.

Denny Lynch, spokesman for Wendy's, said yesterday, "This lawsuit is totally without merit and we intend to vigorously defend our company on behalf of the entire Wendy's system."

This is not the first time DavCo has had a beef with Wendy's management.

Last month, DavCo and other top franchisees signed a letter criticizing Wendy's "autocratic" management style since Thomas' death from liver cancer in 2002.

Complaints

DavCo and other top franchisees also complained about what they see as the slow decline of the brand due to mismanagement and the lack of oversight by the Wendy's board of directors.

Last year, DavCo and other franchisees formed the first-ever franchise association in a revolt against corporate leadership.

Although Wendy's has improved its financial performance this year, the chain's sales consistently fall behind its competitors, McDonald's and Burger King.

Franchisees also have voiced distaste for a series of less-than-successful ad campaigns, including the most recent TV ads featuring men wearing red pigtailed Wendy's wigs.

In the current soda scrap, Norman said that franchisees must contribute 3 percent of gross sales every year to Wendy's National Advertising Program Inc. for television and newspaper publicity.

The lawsuit contends that Wendy's improperly inflated syrup prices by at least 32 cents per gallon in negotiating its corporate contract with Coca-Cola USA Fountain, Norman said.

The suit alleges that Wendy's then diverted the additional funds to the national advertising program.

In doing so, Wendy's failed to properly credit franchisees for the extra money, forcing owners such as DavCo to contribute more than the 3 percent required annually under the contract, the suit said.

$200,000 extra

DavCo had "unknowingly and without their consent been required to make excess contributions of approximately $200,000 per year above and beyond the amount required under the franchise agreements with Wendy's for every year since DavCo signed its contract" with Coca-Cola in 1997, the suit said.

In 1998, Wendy's announced that all franchisees would switch to Coca-Cola. Norman said that 400-plus restaurants still use a different supplier, however, due to contracts that were in place at the time.

Lynch, the Wendy's spokesman, said those restaurants would likely switch to Coke after their contracts expire.

Lynch said that it is common industry practice for restaurants to deal with a sole soft-drink supplier.

"When you're negotiating on a national contract, you're dealing with a greater volume so you can lower the price and you can provide greater value to the franchise restaurants," Lynch said.

Franchisees are allowed to deal only with "suppliers approved by Wendy's," he said.

Control is what's really at stake, Norman said.

`Plain-vanilla claim'

"This is a very plain-vanilla claim," Norman said. "We believe we're entitled to seek out bids from suppliers in our contract. We believe we have received a `no' from Wendy's without legal justification.

"We're not asking to change suppliers, we're just simply asking to bid. And of course, to accept the best offer after the bid. This is just a part of doing business today. Everything is business. Nothing is personal."

dan.thanh.dang@baltsun.com

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