How To Use the "Big Mac" Provision Correctly

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A couple of years ago, there was this fun little commercial from Domino's Pizza, which features a new product called "Bread Bites."

From the commercial, we learn that Bread Bites were created by a Domino's Pizza franchisee in Findlay, Ohio (watch the commercial below).

Franchisee innovation is nothing new. Franchisors often find that some of the best-selling products are created by franchisees.

For example, some of the most popular sandwiches (including the Big Mac, Filet-o-Fish, and Egg McMuffin) at McDonald's were created by franchisees. Indeed, the Big Mac is one of the all-time innovation success stories, having been created by franchisee Jim Delligatti in the 1960s and finally adopted by McDonalds in 1968 (the sandwich quickly became one of the chain's best sellers, accounting for 19 percent of all sales).

These success stories encourage franchising companies to carefully consider permitting franchisees to create new or different products.

That having been said, franchisors have to balance the idea of product innovation with the need to maintain system uniformity and system standards. Allowing franchisees free reign to create and sell new items can create customer confusion (when they can't find a particular item they liked at all locations) and an erosion of goodwill.

This is particularly true where the new item isn't up to the franchise company's brand and quality standards.

As a result, franchisors will ensure that their contract clearly prohibits a franchise from selling new or different products unless they are first approved by the franchisor. That was true in the case of the Big Mac, where franchisee Delligatti's creation was subjected to a rigorous approval process by McDonald's that took several years of evaluation and consumer testing before the sandwich was finally added to the menu.

Equally as important to a franchise company is that the ownership of products created by franchisees is undisputed. Where a new item has the potential to be successful and attractive to consumers, the franchisor wants to be sure that the product can be offered at all locations.

As a result, a careful franchisor will ensure that its franchise agreement clearly addresses the handling of innovations with a provision that explicitly states that any franchisee creations or breakthroughs will be considered the exclusive property of the franchisor.

I like to call this type of franchise agreement provision a "Big Mac" provision, in honor of the granddaddy of all franchisee innovations.

A well-written "Big Mac" provision will also require the franchisee who created the new item to assist the franchisor in obtaining and enforcing intellectual property rights to any such innovation, or, if the rights can't be secured by the franchisor, then to grant the company a fully-paid up and irrevocable license to use the product.

By controlling the ownership of such intellectual property, a franchise company can ensure that any improvements -- be they Bread Bites or Big Macs -- can be rolled out across all of its locations, thereby creating uniformity systemwide.

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6 Comments

Curious about the benefits to franchisee that discovers the new "Big Mac" as you say. Are there any financial rewards/incentives for them? If I was a franchisor, I would want to encourage innovation since the franchisee has the relationship with the customer.

@Matthew -

Like the "Big Mac" provision and I think you make a very practical point in saying...

"franchisors have to balance the idea of product innovation with the need to maintain system uniformity and system standards. Allowing franchisees free reign to create and sell new items can create customer confusion (when they can't find a particular item they liked at all locations) and an erosion of goodwill."

It's also curious that the Filet-O-Fish, Big Mac and Egg McMuffin were all invented by MCD franchisees, but there hasn't been to my knowledge a "barn burner" or a "flaming Bic lighter" franchisee innovated new product introduction at McDonald's in over 40 years.

Regards,

Joe

@Nayden: Sometimes a prospective franchisee asks for the right to some kind of compensation for any innovations created by them as part of the negotiation process. On very rare occasions, franchisors (usually emerging franchisors) will agree to this.

My opinion, however, is that compensation for franchisees under the "Big Mac" provision is ultimately a bad idea. Franchise systems benefit, as a whole, when they are able to capitalize on the shared resources and innovative thinking of all franchisees. Franchisors who permit / encourage innovation generally take the position that building compensation into the "Big Mac" provision will ultimately discourage the sharing of new ideas between and among franchisees because the franchisee who comes up with the new idea will hesitate to share it unless a compensation plan is in place. If franchisees get possessive about their ideas and refuse to share them unless they get paid for the ideas, no one benefits.

Also, not all franchisee innovations are breakthroughs on the level of the Big Mac. Many smaller (but valuable) "tweaks" are made to systems when franchisees share ideas. But if compensation is tied in, the franchisor might not feel that every idea that comes along is so significant that it merits payment to the franchisee who created it -- in which case the idea goes unused and helps no one. And what about changes that provide a benefit to the system but don't necessarily result in an increase in earnings that directly correlates to the innovation? In those cases, any compensation to the creating franchisee can be hard to quantify and therefore make compensation impractical.

@Joe -- I agree. I'm sure there are some examples in the McDonald's system of more recent franchisee innovations, but I am not aware of any that are anywhere near the level of the Big Mac.

Little Ceasers $5 Hot N Ready Pizza is a game changer for the entire company. If they had to pay someone for the idea this would hurt the ability to make money on the innovation as the margins are lower and it was difficult to get over 1,000 locations offering this program.
When in a franchise, need to work for the Great Good and not try to find ways to make money off fellow franchisees. The power of Franchising is the sharing of thousands of best practices and ideas.

Interesting, but how many franchisees see the need to work for the greater good?

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This page contains a single entry by Matthew Kreutzer published on April 14, 2015 1:19 PM.

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