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Financing

Tension reemerges between McDonald’s and its franchisees

Operators raised concerns about corporate support, while the company urged the franchise association to back efforts to raise worker pay during the coronavirus shutdown.
Photograph courtesy of McDonald's Corp.

Tension between McDonald’s and its U.S. franchisees flared up again last week as the brand and its operators continue to deal with the fallout from steep sales losses due to the coronavirus shutdown.

The National Owners Association, an independent franchise group started in 2018, is asking the company for more assistance, expressing frustration that the company denied a request for a broader rent delay than one the company is already providing.

“Candidly, as owners throughout the system become aware of this decision, their lack of confidence and trust in management to honor generic statements and properly manage the company through the crisis and beyond is increasingly waning,” Blake Casper, a Florida franchisee and chairman of the National Owners Association, wrote in a letter last week to CEO Chris Kempczinski and Joe Erlinger, president of McDonald’s USA.

Erlinger, meanwhile, defended the company’s response, noting that McDonald’s “has provided unprecedented levels of financial support to U.S. owner/operators to inject liquidity into our system.”

He also suggested that the association back several efforts to improve pay to workers, including 10% hero pay to workers, two weeks’ pay to employees impacted by COVID-19, establishing emergency relief funds, backing wellness checks and giving crew members free food.

“As you know, McDonald’s has already adopted many of these measures in our company-owned restaurants because they are the right thing to do for our people and we stand ready to do more in partnership with owner/operators,” Erlinger wrote. “Imagine the brand impact such moves would engender; overnight McDonald’s could transform our employer reputation and customers’ perceptions.”

The renewed tension between McDonald’s and its franchisees come as the chain has seen a sudden drop in same-store sales, much like most other restaurants, that appear to have wiped out cash flow gains operators made in recent years.

Same-store sales declined 13.4% last month, which underplays the decline as all of it came in the last two weeks of March.

Franchisees, who had been enjoying record cash flow going into the pandemic, suddenly found themselves fearful of their future. The company quickly declared that it would not let franchisees fail and said it would provide rent deferrals and delay remodel projects. Company executives also took salary cuts.

The steps were viewed as important for a company that had been working to improve its relationships with franchisees. The letters last week were viewed by some as a swift change in tone between the two groups.

The association was formed in 2018 amid a dispute over remodels, and now represents more than 70% of U.S. owners.

Franchisees first presented a relief plan last month. A key part of that plan is a two-week delay in April rent payments for all owners, something the company opted not to do on April 3. In his letter, Casper said “many owners are alarmed over their financial viability.”

“It’s incredulous to hear other landlords are providing rent support to owners and abatements before the company,” Casper wrote.

“Many believe the trust in the relationship has plummeted to depths not realized even during the initial” dispute over remodels in 2018, he added.

Erlinger said the letter from Casper was “disappointing, and not in the spirit of the way we have worked together since I rejoined the U.S. business” last year, when he replaced Kempczinski as U.S. president.

He noted that franchisees whose sales fell 25% or more in the second half of March have deferred rent and service fee payments until Aug. 10. That represents about two-thirds of the entire system.

The remaining third who will be asked to pay, “have strong liquidity, are well-capitalized and able to meet their short-term financial obligations,” Erlinger wrote.

The other 65% will have $180 million worth of rent and service fees delayed until August.

All operators, meanwhile, will have their April rent, due in May, delayed until September.  

Overall, Erlinger said, McDonald’s has provided its franchisees with more than $900 million in additional liquidity. He also noted that franchisees have received improved loan terms from lenders and payment terms from suppliers.

“No other major franchisor has done more than McDonald’s to support its franchisees,” Erlinger wrote.

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