Saying that the right to operate one of its restaurants is “earned, not given,” McDonald’s is making it harder for franchisees to remain in the system, instituting a set of policy changes for renewing franchise agreements that represent a massive shift in the way the company rates long-term operators.
Franchisees, whose agreements typically run every 20 years, will no longer automatically qualify for a renewal of their agreement if they’d been previously considered a good operator strong enough to be allowed to buy new stores.
Instead, they will have to go through a more stringent application process, a move that upends decades-old policy at the Chicago-based burger giant and further changes a system that has undergone a radical internal evolution over the past five years.
“We will no longer use the term ‘rewrite,’” McDonald’s USA President Joe Erlinger wrote in a system message viewed by Restaurant Business. “Moving forward, we will adopt ‘new term’ across the U.S. market to describe the process of awarding another 20-year franchise agreement based on performance history. The change is in keeping with the principle that receiving a new franchise term is earned, not given.”
The changes could fuel tensions between the company and some of its legacy franchisees, who have pushed back harder against the chain in recent years as the brand has changed the way it interacts with its operators. A record number of operators left the system last year, some of them long-time operators who said they did not like many of the changes the company was making in its franchise relations.
Franchisees told Restaurant Business the new standards were “unexpected” and an “overreach” and wondered why they were necessary at a time when the company has been largely successful. Sales have been strong coming out of the pandemic, and operator cash flow hit an all-time high last year—as did the value of the restaurants that are put up for sale.
Yet McDonald’s has been working to diversify its franchisee base and is clearly pushing to bring in new blood, particularly in its U.S. business. In December, the company announced a massive, global effort to recruit new franchisees into the system, an effort that includes financing assistance and reduced requirements for how much equity new franchisees must have when they buy a location.
And in a video message sent to the system and viewed by Restaurant Business, Erlinger argued that it’s important to continuously “fine-tune” policies and procedures.
“McDonald’s defines excellence in franchising,” he said. “We attract the industry’s best franchisees and connect them to a powerful, culturally relevant brand.” He noted that this “creates economic opportunity on an unprecedented scale."
“But we can’t stand still,” he said.
The renewal standards also follow comments Erlinger made to franchisees at the company’s Worldwide Convention in Orlando in April, when he said that the company “will look to grow with those partners who share our commitment to greatness, and this might come from within or outside the system.”
In his system message last week, Erlinger said that the changes in standards will bring “greater clarity, transparency and consistency” into the franchising process.
In addition to changing the terminology from “rewrite” to “new term,” McDonald’s is separating the renewal process from the assessment the company uses to qualify operators to buy new restaurants. Any franchisee that wants to buy additional restaurants must meet certain standards. Such standards were typically used to determine whether they would be approved for renewal.
Erlinger also said the company would create a single approach for the evaluation of new owner-operators who are children or spouses of existing franchisees. All approved candidates will also receive a new training program “to best position them for the process.”
And he said that the company plans to “elevate the importance of values” in the standards the company uses to judge its operators. “Our customers, people and partners look to us to live by our values,” Erlinger wrote. “We must deeply embed them in how we work and the standards we set and seek to achieve.”
Erlinger in his message said that many operators will not experience the changes for “several years” and none of the changes will take place before 2023. He also said the company would use the year to ensure franchisees understand the steps and how the process will work.
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