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Explaining McDonald’s franchise dispute, and why it’s important

Culture shock and finances have led to the current uprising, says RB’s The Bottom Line.
Photograph courtesy of McDonald's

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McDonald’s this year is encountering the biggest uprising by its franchisees in the company’s storied history, one that led to the quick creation of the National Owners Association.

Here is a look at the dispute, what led to it, and what happens from here.

McDonald’s sells franchises, not burgers. As a franchisor, McDonald’s primary business is to sell the right to operate its brand. It gets its money from royalties and rent, which are paid as a percentage of sales. While the company certainly wants to sell more burgers, fries and breakfast sandwiches, they are just a means to an end. It’s the franchisees that employ workers and sell burgers.

The company operates fewer of its own restaurants. McDonald’s over the past several years has sold more of its restaurants to franchisees, and now operates less than 5% of its 14,000 domestic locations. That’s a common strategy at many restaurant chains, but it at least gives off the perception that the company doesn’t understand the dynamics of operations like it once did.

McDonald’s has undergone a LOT of changes. Under CEO Steve Easterbrook, McDonald’s has made an enormous number of changes to its operations and business and has upended numerous, long-held ideas. It sells all-day breakfast. It started serving burgers with fresh beef. It cut hundreds of millions in corporate overhead to speed up decision making. It moved to Chicago and made numerous management changes, often bringing in people from outside the business or industry. This has generated a culture shock throughout the company.  

It has also changed how it deals with franchisees. McDonald’s corporate cuts also reduced the number of district managers that work with operators. These district managers oversee more restaurants and more franchisees. As such, according to the association, these district managers rely more on enforcement and data than on relationships. This has also generated tension with operators.

The remodel project is remarkably aggressive. McDonald’s wanted to remodel all of its restaurants by 2020—a big ask, even though the company is paying 55% of the cost. It has 14,000 restaurants, and many of them were remodeled in recent years. It usually takes numerous years to get all locations in any system redesigned.

It’s also very different. The world’s biggest restaurant chain is adding self-order kiosks. Not everybody thinks it’s a wise investment. While the kiosks have worked in countries like France the U.S. is mostly a drive-thru market and the machines are for inside customers. Spending hundreds of thousands of dollars on a system focused on 30% of your customer base is a risk.

The company expected resistance. McDonald’s insiders have told me they were prepared for the possibility that franchisees would stage an uprising given the number of changes at the company. Indeed, the creation of the association last year was not surprising.

But finances are also a big element. Independent associations are common throughout franchising, but they don’t get created when operators are feeling flush with cash. Franchisees say 40% of them wouldn’t qualify for lease renewal based on McDonald’s own financial standards. And seven in ten say they are “very unsatisfied” with their cash flow. That’s a remarkable change given that, not long ago, the company was touting its strong operator profits.

The association was created quickly. Blake Casper, a third-generation operator with more than 60 units, got the ball rolling with an email over the summer. Franchisees quickly signed up for the first meeting in October and then as many as three quarters of them attended the second meeting in Dallas in December.

The association wants operators to stop new projects for now. The association wants operators to cease new projects not in the works to give the company’s internal franchise leadership, the National Leadership Council, some time to negotiate with the franchisor over changes to the program. The request shows that an association can slow down a company’s efforts.

Walls are a big issue. But it’s not so much a wall as it is the right to not add one. The company wants franchisees to remodel stores with a wall between the kitchen and the dining area. Operators say they are unnecessary and view them as a symbol of the franchisor’s lack of flexibility on the project.

So is complexity. Not to be lost in the dispute is a growing concern about the system’s complexity, especially after all-day breakfast and fresh beef, as well as new chicken products. McDonald’s has long had a complex menu, and franchisees say the demands have slowed down service and hurt traffic.

McDonald’s is taking steps to give operators more flexibility. The company is letting operators remodel stores in 2021 or 2022 in exchange for a smaller, 40% company contribution—instead of the typical 55%. It is also giving local markets more flexibility on the marketing firm, and on a value strategy—both of which were made systemwide just last year.

But it probably has to do more. Operators in particular want changes to the remodel program, especially with regards to flexibility on some of the project’s elements. Franchisees are business owners, and like any business owner they want some control over their business.

The biggest help for the dispute would be sales growth. McDonald’s same-store sales have been outperforming competitors. But traffic has been falling, again, and given the number of changes franchisees expect more.

The best thing for the relationship, therefore, would be stronger sales and traffic growth. That makes the first two quarters of 2019 so important for McDonald’s management and its franchisees. Show some sales growth, and operators will have more cash flow and will be less worried about their futures.

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