McDonald's franchisees to corporate: We're not going to take it

Showdown looms at meeting this week

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McDonald's Credit: iStock

It's tough being a McDonald's franchisee these days. More than 1,000 are expected to voice their displeasure at a meeting in Dallas this week, the latest move in what could become a historic showdown between the fast-food juggernaut's corporate team and its 1,700 U.S. restaurant owners.

The costs of labor, goods and rent are all rising, while diners are showing up less frequently. At the same time, CEO Steve Easterbrook's three-year-old turnaround plan requires store owners to pony up hundreds of thousands of dollars for high-tech store remodels.

As a result, an October effort to create the franchisee version of a union—called an owners association—was successful, as nearly one-quarter of McDonald's U.S. franchisees attended a meeting in Tampa, Fla. The group formally incorporated in Illinois shortly after.

Now the group, the National Owners Association, is gearing up for its second meeting Dec. 12 and 13 in Dallas. Sources say nearly 60 percent of franchisees have registered.

Leaders of the association did not respond to requests for comment. Carmen Caruso, a Chicago attorney who addressed the franchisees at the Tampa meeting, says only that he urges anyone interested to look for updates on the NOA website.

"Everybody's kind of feeling their way through this," says Franchise Equity Group founder Richard Adams, a former McDonald's franchisee who now advises restaurant owners. "There's never been an independent McDonald's franchisee organization before. Everyone's waiting to see the reaction from the company. It's hard to predict, but so far they've been conciliatory to some degree."

Indeed, late last month, McDonald's agreed to push back the remodeling deadline for most of its 14,000 domestic restaurants by two years, to the end of 2022, in a move thought to be a response to the NOA.

"We always welcome and are committed to a constructive, collaborative dialogue with our franchisees," says McDonald's spokeswoman Andrea Abate.

The crux of the NOA's concern is owners' diminishing cash flow, which they say has resulted from corporate's Vision 2020 and "Experience of the Future" strategy to boost sales in a wildly competitive fast-food environment. In addition to demanding more remodeling dollars from franchisees, the plan required them to commit to operational changes necessary to replace frozen burger patties with fresh beef and to allow delivery through partners such as Uber Eats. They also had to adopt a national value menu with no pricing flexibility.

On a quarterly earnings call in October, McDonald's executives acknowledged that the restaurant redos were taking longer than expected and did not result in immediate sales or customer traffic boosts.

"Restaurants have experienced a little longer downtime than we expected, so we're focused on limiting that in order to minimize the impact on sales and guest counts," Chief Financial Officer Kevin Ozan said on the third-quarter call Oct. 23. "The sales and guest count recovery period after we complete a project has also been a little inconsistent, so we've put processes in place to execute strong grand-reopening plans."

To make matters worse from the franchisees' perspective, the remodels focus on the restaurant interiors, despite the fact that many franchisees make most of their money from their drive-thrus. "Stores with drive-thrus do 70 percent of the business there," says Adams. "If only 30 percent of your customers come inside, you have to keep it clean, but you're not going to get hundreds of new customers every day from a remodel."

At least one Wall Street analyst disagrees. Morgan Stanley's John Glass believes the renovations' impact may be underestimated. "We are endorsing the notion that McDonald's massive store modernization efforts . . . will begin to pay off in '19 and should produce best-in-class sales results for more years to come," he wrote in a note to investors Nov. 28.

Franchisees also feel frustration at what John Kujawa, a former McDonald's global franchising vice president who is leading the owners association, describes as a pendulum that, under Easterbrook, has swung from giving owners lots of autonomy to giving them almost none.

"As an owner, one of the most important things you can do to control your business is pricing, but between discounting that's mandated and the national value platform, you're losing that," he told franchisees at the Tampa meeting. Pricing is a particular sore spot for McDonald's owners now, as customer traffic has declined for three consecutive quarters. With fewer people coming in, the only way to keep sales steady is to increase the amount those people spend—a difficult feat when discounts are required.

"What was the thing (McDonald's founder) Ray Kroc was most famous for? The company will make money after the operators make money," Kujawa added. "He knew it was a natural progression. When I look at Vision 2020, does anybody still believe that's the company's philosophy? Far from it, is what I'm hearing."

He recounted a discussion with one franchisee in a low-volume restaurant who spent $250,000 on a lobby remodel two years ago that did not help sales and now has been told he must spend about $500,000 on the Experience of the Future remodel. McDonald's corporate team is "harming the operator by causing post-debt cash flow to go negative," Kujawa said.

In their remarks to the franchisees, both Kujawa and Caruso said the association would not sue McDonald's. "The goal is to have a win-win relationship, not to have lots of lawyers filling your lives," Caruso told them. Still, never say never. On Dec. 5, nearly two months after calling for the removal of the CEO,a Jack in the Box franchisee association sued the San Diego-based burger chain, citing poor leadership.

-Brigid Sweeney is a reporter for Crain's Chicago Business

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