In July 2014, Yum! announced its ‘Value Strategy’ which involved:
- Halving the range of pizzas available at Pizza Hut from four to two
- Reducing the price of ‘Classics’ pizzas from $9.95 to $4.95
- Reducing the price of ‘Favourites’ pizzas from $11.95 to $8.50
The franchise agreement provided that Yum! could determine pricing and the franchisees could not charge more than the price set by Yum!.
The franchisees argued that:
- Yum! had an obligation to set profitable prices, that would enable a franchisee to make, maintain or increase its profits, which it had breached by implementing the Value Strategy
- Yum! owed a duty of care to franchisees which it had breached
- Yum! engaged in unconscionable conduct contrary to s21 of the ACL, by pursuing a strategy to enhance their own profits in disregard of the interests of franchisees
Each of the franchisees’ arguments were unsuccessful.
Following an 18 day hearing, Justice Bennett found that:
- Although obligations of cooperation, good faith and fidelity to the bargain must be considered when construing rights under the franchise agreement, Yum! did not have an obligation to set a price that ensured franchisees would make a profit
- Yum! did not have an express or implied duty of care to franchisees
- Yum! had not engaged in unconscionable conduct by implementing the Value Strategy
Her Honour concluded that the objective of the franchise agreement was to enable franchisees to have a reasonable opportunity to run a profitable operation. However, this did not mean that the maximum fixed price for each pizza in the two product lines had to be profitable for each franchisee, as profit was measured at the level of the franchise operation as a whole.
The assertion that Yum! had to set prices to ensure franchisees could make a profit was practically unworkable, as each franchisee had different abilities and liabilities of which Yum! had no detailed knowledge. As a consequence, Yum! was not under a duty to ensure the profitability of each franchise, nor under a duty to ensure that the profits of individual franchisees were maintained or increased.
Her Honour also found that the franchisees had failed to establish that Yum! had acted dishonestly, in bad faith or with reckless disregard for the franchisees. Yum! believed that implementing the Value Strategy was the best course of action for the future profitability of franchisees. As Yum! was attempting to have first mover advantage against key competitor Dominos at the time the decision was implemented, it was not unconscionable, unreasonable or irrational.
Interestingly, in March, the period for filing a notice to appeal the proceedings was extended until 7 September 2016.
CIE Legal regularly provides advice to franchisors on franchising agreements, advertising and pricing strategy. If you require assistance in this area, please contact us.