McDonald’s is in an ongoing dispute with its franchisees despite the company’s strong sales and the improving financial health for its operators that comes with it.
On Wednesday, CEO Chris Kempczinski said that financial health will ultimately win out and the company will resolve that dispute. He suggested that issues at the heart of the dispute—namely $70 million in additional technology fees—are a “rounding error” when compared to the financial state of the system.
“There are always things that go on in the nature of the back and forth between franchisee and franchisor that make for good headlines,” he said at a Bernstein Research conference, according to a transcript on the financial services site Sentieo. “We had a few of those at the end of last year that spilled over into this year around things like tech fees and our Archways program and Happy Meal rebates.
“In the grand scheme of things, those are rounding errors in the overall health of franchisees.”
Kempczinski himself has said relatively little since the dispute began in December when corporate leadership told U.S. franchisees that they would have to pay a new technology fee this year. In addition, the company said it would end a longtime subsidy for the sale of Happy Meals and would require operators to help fund the Archways to Opportunity tuition program.
That letter ignited a firestorm of protest among operators, who spent weeks talking little with U.S. leadership in a “pause.” While issues over Archways and the Happy Meal subsidy appear to be over, the two sides remain at odds over the technology fees—with operators appearing to be willing to take legal action to stop it.
McDonald’s runs the company’s technology and charges operators fees to use it. The company had been charging operators twice a year but has shifted to a monthly payment schedule and says the $70 million is a debt owed to the franchisor for that change. Franchisees insist that fee isn’t owed and the two sides appear to be dug in.
At the same time, however, the company’s sales have been soaring. The company had fully recovered from the pandemic by the end of 2020 and same-store sales rose 13.5% on a two-year basis in the first quarter, largely on the back of its new chicken sandwich.
Those sales received another boost recently with the introduction of the BTS Meal featuring the popular K-pop group BTS. “We had tremendous untapped reservoir of goodwill that existed with customers that we had not mined,” Kempczinski said.
These strong sales have generated strong profits for operators, and Kempczinski noted that many McDonald’s franchisees received Paycheck Protection Program funds that helped the finances of many operators.
“If you look, 2019 was a record cash flow year,” Kempczinski said. “2020 then became a record on 2019. 2021 will also be a record on 2020. So, three consecutive years we can say confidently of record cash flow levels. And that’s even pre-PPP, so there was also a significant PPP benefit that our franchisees enjoyed that’s not even included in those numbers.”
Kempczinski said that franchisees are acquiring other franchisees “at pretty healthy multiples right now.”
“So you’re seeing multiple expansion on top of record cashflow, which I think gets to franchisee sentiment of being very optimistic about the business.”
As such, Kempczinski said, the current dispute will be resolved. But because of the “nature” of the relationship, a new dispute could well emerge after that.
“There’s always a push and pull that exists between franchisee and franchisor,” he said. “We’ll resolve these issues. But if you have me on a year from now, I’m sure there will be a new set of issues. That’s just the nature of the business. That’s the nature of the relationship.
“It keeps both of us on our toes, let’s just say that.”