Financing

McDonald's franchisees may take their complaints to the FTC

Operators, saying they're being "held hostage" by customer survey standards and new ownership requirements, have hired an attorney and may influence franchise regulations. The company says it just wants to run good restaurants.
McDonald's franchisees
McDonald's franchisees may flood the FTC with comments on the franchise business model. / Photo by Jonathan Maze.

McDonald’s franchisees, expressing fear about their future in the business amid new operating standards, stepped up inspections and changes in ownership approvals, appear to be taking a more aggressive approach in their response to the company.

The National Owners Association (NOA), the group that represents more than 1,000 of the fast-food burger giant’s franchisees, has hired a high-powered attorney, Robert Zarco. It is also planning to make its voice heard as federal regulators take a keener look at the franchise business model. The association urged its members to write letters to the U.S. Federal Trade Commission, which is taking public comment on franchises' business practices.

More than 600 of those franchisees gathered in Houston last week. “The most recurring comments shared were fear,” NOA wrote in a message to its members over the weekend, seen by Restaurant Business. “Fear about individual’s financial health. Fear about being deemed not qualified to buy or eligible for new term. Fear of intimidation and retaliation for attending owner/franchisee-only meetings. Fear for speaking their minds” at various company meetings.

“Fear that the future of a McDonald’s franchisee will not be as bright and positive as it once was,” the association wrote.

Franchisees worry that the new operating standards, coupled with new ownership standards, could force them out of their stores once their franchise agreements come for renewal.

To the company, however, the operating standards are important for the brand to maintain momentum, because customers prefer visiting restaurants with clean dining rooms and prompt service. McDonald’s says the “vast majority” of its operators are eligible for expansion, a key standard for its franchisees. It also argues that improved operations have already led to better guest metrics.

“Our commitment to field execution through educating, coaching and consulting led to improved restaurant operations metrics,” according to an excerpt from a recent message to the U.S. system from McDonald’s USA President Joe Erlinger.

Nevertheless, the company continues to face a strained relationship with its operators despite otherwise strong sales performance. Same-store sales rose 10.3% in the U.S. in the fourth quarter, and 5.9% for the full year. Yet franchisee-level cash flow declined by $100,000 per location last year—though is up 35% since 2018—and operators have begun complaining more loudly about frequent discounts on the company’s mobile app.

McDonald’s last year toughened standards for franchisees to be approved for renewal of their franchise agreements. The company also implemented a series of new operating standards this year, called PACE, or Performance and Customer Excellence program, coupled with more frequent inspections at many franchisee operations. McDonald’s started testing that new strategy last year before making it official on Jan. 1.

In particular, operators are frustrated over the use of consumer surveys, in which the company encourages customers to complete a survey following a visit to one of their restaurants in exchange for free food. The company uses the performance in those surveys to gauge the operator’s performance, and operators with too many negative results—known as an “experienced a problem bottom two box,” or EPB2B—could fail, which could keep them from being able to buy new locations.

Franchisees argue that the surveys are biased and represent a fraction of their customers. They also argue that the company promised the surveys would not be used in the company’s franchising standards but would be used to evaluate trends and opportunities for improvement. “Owners’ futures are being held hostage to metrics derived from guest surveys,” NOA said in a recent message to its members.

McDonald’s, for its part, said the claims that the standard is holding operators hostage “are simply inaccurate” and argues that the standard is “one of many criteria that impact an organization being cleared to purchase new restaurants.”

“We are confident that measuring EPB2B gives owner/operators actionable insights to improve restaurant operations,” the company said in an email.

Dorothy Stingley, elected by franchisees to chair the National Franchise Leadership Alliance, or NFLA, is scheduled to present to the McDonald’s board of directors later this month. The company confirmed that Stingley is planning to meet with the board but says that it has a “long history of inviting a variety of voices from across our system to engage with our board of directors,” particularly as it adds new members.

The hiring of Zarco may be a statement on its own. The Miami-based attorney has made a name for himself representing franchisees and is known for his aggression.  In its letter, NOA referred to a recent request for information by the U.S. Federal Trade Commission seeking comment on franchise business practices.

The association said it would work with Zarco, other trade associations and a legislative strategist to reply to the FTC’s request for information on franchise businesses, which could lead to tougher regulations on franchises as the agency re-examines its franchise rules. 

“The NOA welcomes legislation that supports small business owners, the franchise business model and levels the playing field for the entrepreneurs against the corporate giants,” the group wrote. “Our 1,000 members will provide a tremendous volume of insight and perspective …”

At the Houston meeting, operators passed out copies of the Michael Forsyth and Walt Bogdanich book, “When McKinsey Comes to Town,” about the “hidden influence of the world’s most powerful consulting firm.” Operators have started reading the book, believing that McKinsey’s recommendations are playing a significant role in changes McDonald’s has made in recent years.

One of the speakers at the Houston meeting, meanwhile, asked the attendees which of them were not thinking of leaving the system within the next two years. According to NOA’s letter, none of them responded.  

“If every owner/franchisee is contemplating an exit strategy, how can there be any future McDonald’s, which relies on owner/franchisees to run 95% of the restaurants?” NOA wrote. “This was an unsettling yet revealing reality for all those in attendance.”

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