In June of last year, McDonald’s CEO Chris Kempczinski downplayed the impact of a dispute with the company’s franchisees. At the time, operators were angry over temporary new fees for technology. There were even threats of lawsuits.
He expressed confidence that the dispute would be resolved, which it was, and then said this: “There’s always a push and pull that exists between franchisee and franchisor. We’ll resolve those issues. But if you have me on a year from now, I’m sure there will be a new set of issues. That’s just the nature of the business. That’s the nature of the relationship.
“It keeps both of us on our toes, let’s just say that.”
One year later, franchisees do indeed have another set of issues that are keeping the company on its toes. But we are not so certain we’d be that quick to dismiss it as the normal “push and pull that exists between franchisee and franchisor.”
The current set of issues has blown up in the past couple of weeks over a new set of rules regarding the renewal of franchise agreements. Operators will have a tougher time getting approved to renew their 20-year agreement. Children and spouses must put more equity into a store they take over. It’s all being done in part to open more stores for the chain to diversify its franchisee base.
Yet the National Black McDonald’s Operators Association voted “no confidence” in Kempczinski last week and there is a possibility other groups, including the National Owners Association, could soon follow. That is an extraordinarily rare event. No-confidence votes have never happened at McDonald’s. And we can find only one instance in which such votes happened at any franchise—the 2018 vote of no confidence in Jack in the Box management by that chain’s operators. CEO Lenny Comma would eventually leave the brand.
More to the point, the sheer number of disputes in the system that spill out into the public makes me wonder whether something in the relationship between management and operators simply isn’t working.
We’ve covered franchising for the better part of two decades. It is indeed true, as Kempczinski noted, that there is always a push-pull between franchisor and franchisee. Franchisors make their money off royalties, which is derived as a percentage of sales, and franchisees make their money off the profits from those sales. Franchisors are trying to make things work for the entire brand, while franchisees are business owners whose livelihoods depend on the operation of that concept. There are issues in even the best systems. It’s part of the job.
But we’ve also covered a lot of franchising disputes, including the pre-recession dispute between Quiznos and its franchisees, Burger King’s infamous Dollar Double Cheeseburger problem and the aforementioned Jack in the Box no-confidence vote. In every case, such issues tend to follow business performance. If the franchise and its operators are making money, they will usually put aside any differences.
That’s what makes the McDonald’s disputes so odd. McDonald’s was one of the best-performing chains coming out of the pandemic. That performance continued in the first quarter, when its three-year same-store sales were 17.7%--one of the highest among publicly traded chains and better than each of its primary competitors.
Its franchisees have been able to raise prices and make more money from fewer customers. Operator cash flow hit an all-time high last year. And while that doesn’t necessarily translate into actual profits—many franchisees carry debt—it’s still indicative of strong overall performance. What’s more, the valuation multiples these franchisees are getting for their restaurants when they are put up for sale has also hit records. Only one other brand as far as we know got 10 times earnings before interest, taxes, depreciation and amortization, or EBITDA, for their restaurants: Taco Bell.
When we spoke with one of that chain’s biggest operators, Lee Engler, for a story on its four-lane drive-thru in Minnesota, Engler could not stop gushing about the brand.
For one explanation, it may help to go back to the story we wrote in May, “Mass Exodus.” McDonald's operators expressed frustration with the direction the system was headed. Over the past seven years the brand has slashed corporate overhead, moved to Chicago and changed the way it interacts with franchisees.
There are fewer employees who oversee restaurants and visit them regularly. And since the start of the pandemic, they visit them less still, largely working from home. In other words, McDonald’s cut back on and replaced many of the people on the front lines of franchisee communication with people who spend less time developing relationships with operators. Those relationships are key, particularly for a brand that long called its operators an important element of the “three-legged stool” driving the brand forward.
Perhaps it’s change itself. McDonald’s has been making some big changes—the renewal requirements may be the biggest. Many people do not like change. And operators who feel as if this change is being forced upon them, they have a tendency to react and push back.
Maybe it’s something else altogether. Whatever it is, something apparently isn’t working with McDonald’s relationship with its franchisees. So far, it’s not affecting the brand’s performance. But that may not last.