McDonald’s franchisees are partially ending their weeks-old pause in non-essential communications with the company as the two sides have resolved some issues in their weeks-old dispute, particularly over the structure of the company’s Archways for Opportunity tuition program.
But the two sides remain far apart on $70 million in technology fees, sources tell Restaurant Business, with owner-operators opting to stop talking about the topic. Franchisees will start talking with McDonald's field offices, though the pause in non-essential communications with national leadership remains on.
McDonald’s U.S. franchisee leadership held meetings with the system on Friday, hours after the company sent operators an email arguing the case that franchisees owe excess fees to pay a debt on the franchise’s technology fund, stemming from a change in the timing of payments.
The end of talks, and the potential that McDonald’s starts charging its operators excess fees for technology during the year, increases the chance that the dispute will get solved in court. Both the company and its franchisees, through the National Franchisee Leadership Alliance (NFLA), argue their respective views on whether the excess fees are owed, and talks didn’t resolve those differences.
Franchisees argue that they’ve studied the issue and the payments extensively and concluded that there is no back pay owed to the company for the use of things such as smartphone apps. Leadership from the NFLA told operators on Friday that they believe the issue is “irrefutable” and that they will no longer discuss the matter.
Joe Erlinger, president of McDonald’s U.S. market, said the company plans to have its independent auditor, Ernst & Young, review the technology fee to confirm whether it’s owed. Erlinger expects that review to take weeks. “To be clear,” he told operators, “we have absolute confidence that the payable is owed to the company.”
The dispute stems from a December email from the company to its operators informing them of a trio of changes that would affect their profit-and-losses during 2021. The changes included the end of a subsidy to keep down the cost of Happy Meal toys and another for the tuition program, along with the technology fee. Owners estimated the trio of changes would cost franchisees $170 million this year.
That email generated huge pushback from franchisees, who saw it as a directive that hurt their profitability. In protest of the fees, franchisees started withholding all non-essential communications with the company. They also started questioning some value offers.
Some 95% of McDonald’s franchisees voted to go forward with the pause earlier this year, which operators have said is an unusual level of agreement for the group.
The two sides then began talking about the different issues, while operators pushed some additional concerns regarding rent payments and delivery charges. Still, Erlinger said, “our last several conversations have been productive and positive,” with the groups aligned on issues related to the tuition program.
There had been some pressure on franchisees to end the pause, which at one point left Joe Erlinger, president of the company’s U.S. market, on hold alone during a previously scheduled meeting with franchisees. Erlinger himself urged franchisees to start talking with the company again.
One group of operators, apparently calling itself the LWS Coalition, sent an email Friday to franchisees, obtained by Restaurant Business, calling for an end to the pause and critical of existing franchisee leadership for what it calls the “union like behavior” of the NFLA.
It is uncertain what operators are part of this coalition, or how many is involved. The group called itself “advocates for our current process to work.”
“If we act like a union, we will be treated like a union,” the email said. “The pause is not consistent with our culture of collaboration and partnership.”
The technology fee that remains in dispute was one of the biggest points of contention between the company and its franchisees. The company oversees the system’s technology and charges franchisees for its use, and argues that the fee, coming out to about $5,000 per store, is necessary to cover a change in how it’s paid from annually to monthly.
Franchisees have grown frustrated over the technology fees and how much they have to pay the company for its use. Operators, through the National Owners Association, have been making plans to establish a technology cooperative that franchisees would oversee, rather than the company.
UPDATE: This story has been updated to clarify the state of franchisees' communications pause.