The National Black McDonald’s Operators Association (NBMOA) last week took a vote of no confidence survey on CEO Chris Kempczinski, sources said.
The owners, according to sources, approved the vote—a rare move by a key group of operators in the world’s largest franchise. It’s also possible, sources said, that McDonald’s Women Operators Network, as well as the larger National Owners Association (NOA), could take similar votes.
Such votes are rare in any franchise system, and several longtime observers cannot recall such votes ever taking place at McDonald’s. “Never,” one longtime owner said. Yet they are indicative of growing anger among owner-operators, particularly over new rules on the renewal of franchise agreements and the transfer of stores to franchisees’ spouses or children.
The vote by Black owners comes as many of the company's changes are being done with increasing overall system diversity in mind.
Many franchisees, who have long operated under the assumption that they would automatically renew if they met the company’s standards for growth, now must go through a more-rigorous process simply to remain in the system.
The new standards come on top of several other changes McDonald’s has made in its relationship with franchisees, including the more aggressive use of store purchase rights and a subsequent increase in those stores’ rents, as well as surprise inspections of stores.
To some, the changes represent an effort by the company to push out activist and vocal owners in favor of those who toe the line. One operator called it an “absolute declaration of war on owners.” Another called the company’s action a “transfer” of assets from franchisees to the company.
McDonald’s, for its part, would not comment on any votes taken by franchisees beyond what Joe Erlinger, president of the company’s U.S. market, said in a system message announcing the new ownership standards earlier this month.
The standards, he wrote, will not affect all the stores immediately, given that franchises are renewed every 20 years. That means an average of less than 700 restaurants per year are up for renewal, and most of the chain’s 13,400 U.S. locations will not be renewed for years.
In his message, Erlinger suggested that the chain’s performance in recent years makes this the best time to look at such standards. “Today, our system is operating from a position of strength,” he wrote. “We’re winning in an extremely challenging market—and that momentum is the direct result of our legacy of operational excellence, supported by a strong, relevant brand.”
McDonald’s has been one of the industry’s top-performing restaurant chains coming out of the pandemic. Operator cash flow hit record levels in 2021, even amid rising inflation, while the valuation on McDonald’s restaurants likewise hit records. That alone makes the level of franchisee unrest in the system unusual. Typically, such disputes take place when brands—and franchisees—are underperforming.
(For more on McDonald’s relationship with its franchisees, read our piece “Mass Exodus.”)
But McDonald’s has had a complex relationship with its franchisees dating back to at least 2017, when the company demanded remodels of operators known as “Experience of the Future,” which helped lead to the formation of the NOA. More recently, disputes between the company and franchisees have emerged over a variety of issues, including one over technology fees that was met with rare threats of legal action.
More recently, anger had been brewing over the company’s use of its right of first refusal to buy out franchise stores that are put up for sale. In many cases, operators say, McDonald’s increased rents from 5% of revenues to 13%, then sold them off to other franchisees. The company then instituted surprise inspections, called PACE, that likewise angered operators who said that it made operations more challenging.
The NBMOA’s vote, however, specifically mentions the company’s announcement to U.S. operators earlier this month that it would toughen rules on franchise renewals.
“We will no longer use the term ‘rewrite,’” Erlinger wrote. “Moving forward, we will adopt ‘new term’ across the U.S. markets to describe the process of awarding another 20-year franchise agreement based on performance history. The change is in keeping with the principle that receiving a new franchise term is earned, not given.”
One of the new rules removes the old standard for renewals, which simply said that operators that had been previously approved to buy new restaurants would be allowed to renew their agreements. Operators will now go through a separate approval process that includes new performance metrics.
In another one, spouses or children of franchisees would have to meet new, tougher standards for putting equity into a store they acquire. The company said it is also placing a heavier emphasis on “values” when measuring franchisee performance.
Those new renewal standards come as McDonald’s has been pushing to diversify its franchisee base, including the investment of $250 million over the next five years to help provide financing to operators that come into the system—as well as lowered standards for upfront equity requirements.
That the first “no confidence” vote is coming from a group representing Black operators is notable, given that McDonald’s has been criticized over its lack of franchise diversity and sued by current and former Black franchisees over alleged discrimination. Sources say that Black operators approved the “no confidence” vote “overwhelmingly.”
That said, the company believes the current environment, where demands for improved diversity are growing while customers and employees themselves demand more out of U.S. businesses, makes this an important step. “We’ve been doing a lot of thinking about how we continue to attract and retain the industry’s best owner/operators—individuals who represent the diverse communities we serve, bring a growth mindset and focus on executional excellence, while creating a positive work environment for restaurant teams,” Erlinger wrote.
As for what happens now, that remains to be seen. Franchise leadership was set to meet with Kempczinski on Tuesday. Beyond McDonald’s, such no-confidence votes are extraordinarily rare events. Only one instance in recent memory is known: The 2018 vote of no confidence in management by Jack in the Box franchisees. The CEO at the time, Lenny Comma, initially survived the vote, but was replaced two years later.