Yum's KFC Unit Goes to Trial With Franchisees Over `Grill Baby Grill' Ads

Yum! Brands Inc.’s Kentucky Fried Chicken unit and some of its franchisees are embroiled in a battle over advertisements for crispy-versus-grilled products in a non-jury trial that began today in Delaware.

The franchisee-dominated KFC National Council and Advertising Cooperative Inc., which designs marketing programs for the world’s most popular chicken restaurant chain, contends that KFC President Roger Eaton is seeking to promote grilled chicken over the company’s traditional product.

“It was ‘grill baby grill’” even though sales were falling and it seemed “things went to hell in a handbasket,” franchisee John R. Neal, who has 201 stores in 11 states, testified today in Delaware Chancery Court in Wilmington.

Neal said new grilled chicken sales took off with a promotion in May 2009 by the Oprah Winfrey television show offering free two-piece meals with online coupons. But he said grilled sales “began to deteriorate” after that.

The council’s January lawsuit contends ads for the company have been “lopsided towards grilled chicken” and asked Judge Leo Strine Jr. to determine who has authority to decide what to advertise.

The council has 17 board members, 13 of them representing franchisees that operate 83 percent of KFC outlets. KFC “has recently taken the position that KFC Corp. has the sole authority” to direct advertising, and the council cannot “modify or suggest changes” to KFC proposals, according to court papers.

‘Baseless’

Yum, based in Louisville, Kentucky, has said the lawsuit is “baseless.”

Neal, who has had franchises in the south for 40 years and is vice chairman of the council board, told Strine he joined the company in the 1960s. He said he was “stunned and shocked” when the company sent the council a letter insisting that final say on all ads belonged to KFC.

The company also accused the council of violating an agreement with KFC, and said uncooperative franchisees could be terminated and face “personal liability,” Neal testified.

“This letter pushed us over the top,” and the suit was filed, Neal told the judge.

The company has more than 15,000 KFC outlets in 109 countries and territories, and serves 12 million customers a day.

Yum, with $10.8 billion in 2009 revenue, rose 83 cents, or 1.8 percent, to $46.58 in New York Stock Exchange composite trading at 4:15 p.m. The shares have risen 33 percent this year.

Delaware’s Sussex County, one of three in the state, is the country’s biggest chicken-producing county, and the birthplace of the broiler chicken industry, according to its website. Its 200 million chickens a year are almost double the output of runner-up Cullman County, Alabama, the county claims.

The case is KFC National Council v. KFC Corp., CA5191, Delaware Chancery Court (Wilmington).

To contact the reporter on this story: Phil Milford in Wilmington, Delaware, at pmilford@bloomberg.net.

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.