McDonald’s early next year will start grading franchisees based on the value they provide at their restaurants, yet that push could infringe on operators’ right to set their own prices and may diminish their profitability.
That, at least, is the view of some operators that worry that McDonald’s new value standard will ultimately damage the value of their restaurants.
“One of the long-time shared principles in the partnership between the franchisee and franchisor has been the agreement that [owner/operators] maintain the ability to determine and set their own pricing, outside of national promotions, based on the dynamics of the local market,” the National Owners Association, an independent group of McDonald’s owners, wrote in a message to members, seen by Restaurant Business. “It is imperative that [owner/operators’] price independence continues.”
McDonald’s announced a new value provision to its global franchising standards earlier this month. The goal is to ensure that its stores provide a good value based on local market conditions.
Starting in January, McDonald’s will assess the outcomes of franchisees’ pricing decision in relation to providing value to customers. McDonald’s will assess operators’ use of pricing tools the company has available, their work with pricing consultants, support for system promotions and business performance. The company also said it would consider local circumstances that affect individual restaurants.
In the process, the company stressed that franchisees would continue to set their own prices. McDonald’s reiterated that in a statement to Restaurant Business on Monday, while noting the need to ensure the chain’s value proposition.
“Showing up for customers with great value is just as important today as when we first opened our doors 70 years ago, and our franchisees understand that,” the company said in a statement to Restaurant Business. “As the new standards take effect next month, the tools and resources provided to franchisees will help them make informed decisions that enhance the overall customer experience while continuing to grow their businesses.”
Yet McDonald’s value standards represent the latest in an ongoing evolution of the franchise relationship under CEO Chris Kempczinski. Over the past several years the company has pushed aggressive remodels, changed its field operations team, toughened ownership standards and made it harder for relatives of franchisees to take over stores. All of that was done to speed decision-making, ensure consistent operating standards and give the company more control over the system.
Its latest effort gets into a crucial part of being a franchisee: The ability to set prices based on local market conditions. Labor costs vary from city to city and state to state. Rent costs also vary. McDonald’s controls the real estate and charges franchisees rent based on a percentage of sales. That percentage can be 18% or even higher in some cases.
Despite McDonald’s assurances that operators control pricing, the value standard was nevertheless viewed by some as infringing on that right.
“It really changes the relationship owner/operators have with the corporation,” said Jim Lewis, a former McDonald’s franchisee. “It’s a big change. It’s a really big change.”
Yet it’s also a change McDonald’s believes is important. Franchisees raised prices aggressively coming out of the pandemic to offset their own soaring costs. But that has earned the ire of consumers, while brands like Chili’s have marketed against the chain’s prices. Sales and then traffic started falling, and though the company has recovered more recently, there remains deep concern about traffic from low-income diners.
There is at least some concern that some franchisees are raising prices too much. The company was sued by one franchisee last year who said McDonald’s was pushing him out of the system. Among the company’s complaints about the operator, according to the complaint: The operator didn’t use advisors to set prices and raised them too aggressively.
The company’s value efforts over the past year and a half also haven’t quite brought in the traffic many hoped for, though McDonald's says that they are working. “Marketing is putting together all sorts of value campaigns,” Lewis said. “He’s tried a lot of things the last three or four years from Chicago for the whole country. It just doesn’t work. What works in Iowa doesn’t necessarily work in California and doesn’t work in Texas.”
On a more practical level, NOA worries that operators could be forced to lower prices “below sustainable levels, particularly in high-cost markets,” NOA said.
If future profitability is uncertain, meanwhile, operators may have to discount their restaurants in a sale process.
There’s also concerned that parts of the criteria could be subjective. “If ‘value leadership’ becomes a scored metric, franchisees might receive adverse evaluations based on evolving or subjective criteria,” the association said.
A uniform value standard could also disproportionately penalize operators in regions with higher-than-average rent, high levels of low-margin transactions or scarcer labor pools that lead them to raise wages to attract workers.
McDonald's, for what it is worth, expects local differences to influence prices but also argues that the chain can be profitable and still offer good value. And there's no question that the company needs to protect its value reputation.
“All they’re trying to accomplish is keeping McDonald’s value image,” Lewis said. “They still have to be a value play, that’s a key tenet of the business and they’re not wrong. But they’re trying to control it from Chicago. It’s a sticky wicket.”