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McDonald’s hit with an unusual combination: franchisee unrest and strong sales

RB’s The Bottom Line examines the debate over technology fees between the company and its owners, and why it matters.
Mcdonald's franchisee dispute
Photo courtesy of McDonald's

The Bottom Line

Over the weekend, Blake Casper, the chairman of McDonald’s independent franchise group the National Owners Association, sent a letter to membership that encapsulated the dichotomy at the Chicago-based burger giant.

Casper boasted about the company’s current performance, including a series of marketing wins that helped generate 5.5% U.S. same-store sales growth in the fourth quarter and even better numbers in January, and likened the company’s marketers to Super Bowl-winning quarterback Tom Brady.

But he also said this on the franchisees’ current dispute with the company over $70 million in technology fees: “There was no six-month lag and we do not owe the money. It’s that simple.”

In general, sales growth is the elixir that cures all franchise ills because it’s usually followed by the growth in profits franchisees require for their income. That’s what makes the issue pitting McDonald’s and its owners so unusual. It arose in December and was followed by an unprecedented pause in communications with the franchisor at a time when the chain is outperforming most of its biggest rivals.

Franchisees partially ended that pause in non-essential communications last week—opting to speak with field officers while still withholding communications with national leadership.

That said, more than 1,000 franchisees were on a call with executives on Monday, when they explained the company’s position on the technology fees and why operators owe that debt.

The dispute arose in December, when the company told franchisees in an email that they would pay two new fees—repaying the technology debt and contributing to the Archways for Opportunity tuition program, while a longtime subsidy for Happy Meals would be ended. That led to the pause, approved by 95% of the company’s operators.

Two of those issues were resolved, but the technology fee—amounting to an extra $5,000 per restaurant this year—remains.

McDonald’s contracts with vendors to provide technology, such as point-of-sale systems and fancy drive-thru menu boards, that franchisees use in their restaurants. The franchisees then pay the company for this use. As technology has increased in importance in restaurants, the amount of technology provided has increased and so has the cost.

Over the years, the company has shifted how it charges operators for the use of that technology. McDonald’s used to charge operators twice a year, calculating this on June 30. In 2017, the company transitioned to a monthly payment schedule. McDonald’s said that, as a result of the shift, six months’ worth of technology fees were not paid, accumulating a debt worth about $5,000 per store, or an estimated $70 million.

Executives spent a half-hour explaining the issue to franchisees on Monday and through several meetings. The company has also promised to have its auditor, Ernst & Young, to examine the billing cycle. During the Monday webcast, viewed by Restaurant Business, executives told operators that this review would take weeks.

Mason Smoot, chief restaurant officer for McDonald’s USA, told operators that the company reviewed 20 years of technology payments and held several meetings with franchisee leadership to explain the issue.

That said, operators have their doubts. Leadership from the National Franchise Leadership Alliance, or NFLA—the internal franchisee group—said that a pair of their own audits confirmed that there was no such lag and that they do not owe the funding. Operators called the issue “irrefutable.”

The debate likely hinges on the completion of the Ernst & Young review. Absent a compromise, the dispute over fees could continue to loom over relations between the company and its franchisees, who operate 95% of McDonald’s 13,800 U.S. locations. It is also leading operators to question who should control technology, and speaks to a shift in the relationship between the company and its operators, who have grown more activist over the past four years.

At this point, the debate between McDonald’s and its franchisees doesn’t appear to be standing in the way of the chain’s sales. The company on Thursday started promotions for next week’s introduction of the chain’s Crispy Chicken Sandwich, a long-awaited product largely championed by operators, including the NOA, whose leadership operates stores in the Southeast, near top rival Chick-fil-A.

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