McDonald’s franchisees plan to re-evaluate future value offers, including an upcoming plan to sell all drinks for $1, as they push back against higher charges and the end of a longtime subsidy—moves they say will eat into their profits.
Leaders of franchisees’ internal leadership organizations plan to revisit the issue of the $1 drink, which had previously been approved, citing a change in the financial outlook for 2021 given the new fees that were recently announced by the franchisor. Operators estimate that the additional fees, including a technology charge and a contribution to a tuition reimbursement program, will cost each store an additional $12,000 next year.
In addition, 95% of franchisees surveyed this week agreed to withhold all “non-essential” contact with the company in protest over the changes. The protest left Joe Erlinger, president of McDonald’s USA, on hold for 15 minutes during a scheduled call with operators in Ohio. No franchisee showed up.
“They’ve lost the locker room,” one operator said.
McDonald’s did have a meeting with franchisee leadership on Tuesday—a company official called the meeting “productive,” noting that the two sides formed smaller groups to discuss each individual issue dividing the two sides.
“The company acknowledges the situation and will continue to make every effort to engage franchisees so that together we can effectively operate our businesses,” the company said in an emailed statement.
“We agree that running 14,000 restaurants during a pandemic demands continued collaboration and focus on protecting the safety of McDonald’s restaurant crew and exceeding the expectations of our customers. We have every confidence that franchisees will continue to rise to this extraordinary responsibility and are committed to maintaining positive and productive relationships with them in that pursuit.”
In an emailed statement, Mark Salebra, who chairs the National Franchisee Leadership Alliance (NFLA), an internal organization, said operators are committed to the business over the “short and long term.”
“Our franchisees are aligned and fully committed to driving our business for the short and long term and will be strategic in our approach to any adjustments considered to our 2021 plan,” he said.
Franchisees’ moves to hold off communication and revote on value are unprecedented in the McDonald’s system—no operator we spoke with could ever recall a similar situation. But they are a clear sign of operator anger over the new costs and the end of a decades-old subsidy designed to keep down the costs of Happy Meals.
McDonald’s informed operators of the new fees in an email earlier this month. In addition to the end of the subsidy the company told franchisees of a temporary new technology charge next year designed to eliminate a debt on operators’ technology payments, and another charge to help fund the Archways to Opportunity tuition program. Franchisees estimate this will cost them $170 million in total next year. Many say they were blindsided by the charges.
McDonald’s has argued that the charges have been in the works since 2017 and should not have come as a surprise. They say that the funds used for the Happy Meal subsidy will be reinvested in other areas, notably workforce issues. The company also argues that franchisee contribution to the Archways program will increase its size and effectiveness.
The two sides differ most on the technology debt. McDonald’s says it is simply recouping $70 million it is owed for technology services, the result of a shift from a six-month payment plan to a monthly plan. But operators argue that they don’t owe that $70 million.
The controversy also highlights the competing priorities for franchisors and franchisees.
The company is rolling right now—September was one of McDonald’s best months in years, and the return of the McRib appears to be providing an end-of-year boost for the burger giant.
Yet franchisees make their money off the bottom line, the profits they earn after paying rent, royalties, labor, food and other costs. Franchisors make their money off the top line—McDonald’s gets revenue from rent and royalties, collected as a percent of sales.
As such, conflict can arise between the two even when sales are good because franchisees want to make sure they are profitable, while franchisors are more concerned with sales.
Franchisees’ moves this week demonstrate that the dispute is making it more difficult for McDonald’s to implement certain strategies.
Value is clearly a key component for the company. Franchisees control whether McDonald’s can make regional or national value offers.
By reconsidering the $1 drinks offer, franchisees could put a stop to what has been a key element of McDonald’s value strategy in recent years, particularly as it finds itself competing head-to-head with convenience stores.
Operators say they need to protect their profit margins in light of the new costs next year and so they are looking at everything, including value.
But the shutout of company leadership and operators’ unity behind it is surprising. The NFLA surveyed operators at a meeting and found 95% of them backed a strategy not to speak with the company unless absolutely essential.
By avoiding company meetings, that could keep McDonald’s from being able to communicate key initiatives. In some instances, franchisees are meeting among themselves to discuss important topics, rather than joining meetings with McDonald’s leadership.
A company official said that there are differences in opinion between what constitutes “essential” meetings. As a result, McDonald’s executives are keeping meetings it deems essential while franchisees do not agree and are not showing up to them.
UPDATE: This story has been updated to include a comment from the head of the NFLA.