October 17, 2018

MCD - Franchisee Concerns Prompt Plans for Independent Association

By Maryann Jones
McDonald's franchisees are growing weary of expensive, rapid-fire changes from corporate and are now in the process of forming an independent association, in the interest of prioritizing changes they hope to present to the company.

On Oct.10, the Wall Street Journal reported that approximately 400 U.S. McDonald’s Corp. franchisees met in Tampa, Fla., to discuss the formation of an independent operators’ association. The formation of the group comes in response to growing concerns among McDonald’s franchisees about the company’s current growth strategy. While other quick-service restaurant chains -- such as Restaurant Brands International Inc.’s Tim Hortons (see OTR Global’s June 1 note) -- have seen franchisees form independent associations as a way to provoke corporate change, this is a first for McDonald’s.

OTR Global spoke with two longtime, franchisee sources (one each in the West and Southeast) about specific concerns that prompted the meeting. Neither franchisee attended the meeting; however, one was aware of it and plans to attend the follow-up meeting planned for Dec. 12, and expects attendance of the second meeting to be very high. The other franchisee, from the West, was not aware of the meeting, and was somewhat surprised to hear about it, but not surprised by the level of concern and dissatisfaction among fellow franchisees that he believes is driving them to organize. Both franchisees indicated owner/operators are disgruntled by the rapid speed at which the corporation is trying to push through changes, and the high costs attached to the changes.

Remodeling Costs Rising Quickly
Sources expect the group to focus on at least two key priorities at the December meeting: timing and costs of McDonald’s Major Remodel Program (MRP) and McDonald’s new grading system. “There's an upheaval going on because we are being forced into big investments. [McDonald’s has] a great plan in terms of modernization, upgrade of our product and better tastes. And new technology such as new order points, kiosks, Uber Technologies Inc.'s Uber Eats, and order by app -- they’re all great things, but it all comes at a significant price,” he said. “Our technology costs have skyrocketed. I used to spend $300-$500 per month [per store] on technology, and now I’m spending [several] thousands per month.” While the franchisee’s co-op has its front-of-store and drive-through technology updates nearly complete (spending more than $600,000 on average per store in the past two to three years), the source said other parts of the country are lagging considerably, and the next round of MRP investment -- $200,000 kitchen technology upgrades (per store) -- is planned for 2020. In addition, costs for those who have not remodeled yet have increased since the company first laid out plans. “The expense for MRPs is higher than original projections, because of the construction boom and materials inflation,” the source said.  

As part of the MRP, the Southeastern franchisee was forced to remodel all of his 10-plus stores, including a few that had been built or remodeled less than 10 years ago. The franchisee described frustration with the fresh beef launch, which came on the heels of the chicken tenders launch. “It was a disaster; we were out of those tenders for almost three months and sales have never recovered! How does McDonald’s run out of product?” Both franchisees said trying to roll out new initiatives at the rate McDonald’s was working put too much stress on the stores, and too much stress on the franchisees' budgets. One said he added two new meat refrigerators (at a cost of $4,200 each), as part of the early MRP plans, prepping for the fresh beef launch, but it was later deemed that only one per store was necessary.   

Dissatisfaction With Grading System
Both sources also said many operators are very dissatisfied with recent significant changes to McDonald’s restaurant grading system. Previously, restaurants were assigned field consultants that visited stores regularly, and with whom the restaurants had positive working relationships. However, as of September, McDonald’s has hired individuals (approx. 10 per region) whose sole responsibilities are to grade stores, using one-day, unannounced visits. It's believed the change was implemented as a corporate labor cost initiative, but both sources said it's causing tremendous stress on franchisees, managers and crew. “Any store can have a bad day, and that grade is pivotal within the company,” one said. “It also has a huge impact on our people. Imagine being told you’re doing a terrible job, and not being told why or given any other details. It just started in September, and owner-operators are already seeing problems.” The other said some of the company’s safety guidelines had become too strict, including one requiring employees to wash their hands every hour on the hour. “McDonald’s is beating our staff up, it's too much. … Staffing is too hard as it is, and then guidelines are so intense,” the source said. The source said the company has at least given franchisees the heads up that grading visits during 4Q18 will be focused on breakfast.

Ownership Costs Pressuring Smaller Operators
The Western franchisee said he has noticed a recent spike in the number of franchisees -- mostly smaller operators -- leaving the McDonald’s system altogether as the price to own a McDonald’s has skyrocketed. “McDonald’s restaurants have become very expensive. Owner-operators used to pay 5X cash flow; now they are paying 8X cash flow and higher to get into a restaurant. There are a lot of owner-operators who are pretty strapped financially,” the source said.  

The Southeastern franchisee said several owner-operators have expressed concern about the franchise agreements and the renewal process and are looking for franchise agreements to be revised. “It is very one-sided. Franchisees have no say in the process; there is no negotiating and no flexibility. For example, the franchise agreement specifically states [restaurant] hours of operation, but some stores are unique and it doesn’t make sense to stay open until 11:00. It seems petty, but you have to understand McDonald’s is pushing a lot of things down our throats that are costly and often lose money.”

Finally, one franchisee said, “I think [Chris Kempczinski, McDonald’s U.S. President] has done some good things for the company, but he's made it clear that either you get onboard or you get out. … I continue to have high expectations for my restaurants. But the turmoil in other areas could cause some problems -- when you're not unified, it could cause some significant problems.”

Contributors: Katie Jacobson

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