McDonald’s faces franchisees who claim chain is on a ‘destructive path’

The discontent represents a risk to McDonald’s growth plans, said John Gordon, principal at Pacific Management Consulting Group, a restaurant and franchisee adviser. If this unrest leads longtime franchisees to “hang up the towel” then it’s an “inherent operating risk” for McDonald’s because replacement franchisees may not be as well capitalised, he said. Newer franchisees would likely face higher borrowing costs, he added.

McDonald’s says that its longstanding relationships with lenders allow the company to connect franchisees with competitive financing options for growth. In an emailed statement, it acknowledged that inflation trimmed profitability for franchisees last year, but said cash flow has risen 35pc per restaurant on average since 2018 and long-term returns are “strong”.

Owners’ increasingly vocal criticism comes amid a sales boom that has bolstered McDonald’s shares and won over Wall Street. Same-store sales have grown in recent quarters as customers flock to the chain’s affordable options and a menu that includes a revamped chicken sandwich.

McDonald’s plans to open 1,900 new locations this year worldwide. This week it announced the hire of Tabassum Zalotrawala away from Chipotle Mexican Grill to serve as US chief development officer and help lead the efforts.

“Having spent the past five years investing our capital and energy in modernising our business, we’ve earned the right to build new restaurants and set aggressive goals,” the company said.

But as it eyes the expansion, management is having trouble winning over franchisees. Certain franchisees are concerned by the unrelenting climb in wages and costs for ingredients and packaging. The National Owners Association in the US estimates that McDonald’s locations, on average, will generate less cash for a second straight year in 2023.

Some franchisees are also angered by what they say is an increase in surprise visits from corporate inspectors, which they argue are scored unfairly and drive talented managers away. Some report their restaurants remain short staffed even with higher pay. New lease rules are another point of contention, as well as a policy that no longer gives family of current owners preferential treatment for contract renewals.

“Most of these people like to pass this business down to their kids,” BTIG LLC analyst Peter Saleh said.

He added that if new leases cost more – an area of franchisee concern – then owners are less likely to invest in further initiatives.

In a recent internal bulletin, the National Owners Association called on management “to slow down the chaos and allow our restaurant teams to focus on providing the best experience to our loyal guests”.

The issues are likely to come up when Dorothy Stingley, who recently became head of the National Franchisee Leadership Alliance – another group that represents McDonald’s owners – meets with company directors on March 28. Stingley and her husband operate 15 locations.

McDonald’s said the meeting will include “a variety of voices” such as franchisees and suppliers as new board members get familiar with operations. ​

In a March 1 letter accepting McDonald’s chief executive officer Chris Kempczinski’s invitation to the meeting, Stingley praises his leadership.

“Our business is changing, the challenges are real, and we are working to set the next generation up for success,” Stingley writes.

Meeting topics listed in the letter include “how to improve plan execution in restaurants” and “how we define economic success and our perspective on current performance”.

It’s unusual, but not unheard of, for franchisees to go before the board of their parent company, said Bill Ide, an attorney and company counsel at Akerman LLP who served on the board of Popeyes’s former parent company.

“If the management and franchisees are out of line with each other, then the board would need to know that, because it could have a material impact on the company,” he said.

The company has said changes to how it grants franchises are meant to help recruit and train a more diverse set of owners. McDonald’s has also emphasised that any new franchise agreement should be earned, not given.

The company delayed the new inspection practices to allow owners more time to learn and prepare.

Franchise owners must pay for everything from coffee makers and trash cans to insurance and landscaping before collecting profit.

Evercore ISI analyst David Palmer wrote this week that McDonald’s has changed its decision-making process as it shores up US operations, resulting in “more top-down and less consensus-building” with franchisees.

He added that this may be needed “to drive improved execution at the restaurant level.”