Discontent eating into McDonald’s franchisees

Mounting financial strain is fuelling frustration among McDonald’s franchisees. Source: AP

Steve Easterbrook, the fast-food chain’s new chief executive, in recent weeks has spelled out several revival initiatives that require franchisees to invest further, including offering more customisable burgers and building more double-lane drive-throughs.

He also wants to get them to buy more restaurants from the chain, and is raising wages at company-owned restaurants in the US — creating pressure on franchisees to follow suit.

Those initiatives are aggravating discontent among some US McDonald’s owners who already are struggling with hefty debt ­accumulated in a campaign of ­restaurant upgrades over the past decade, according to franchisees and lawyers and consultants who work with them.

Shrinking sales in recent years undermined the expectations built into those ­investments, leaving the franchisees with higher levels of debt than the chain ­prefers.

“I have never seen the operator community so demoralised, frustrated and distrusting,” said one longtime McDonald’s franchisee in the south who is trying to restructure his debt. He said he will manage, but adds, “there are operators who are looking at the calendar and saying, ‘If business doesn’t get better in six months, I have a problem’.”

Getting a Golden Arches franchise has long been a golden ticket for small-business owners. After Chick-fil-A, which is much smaller, McDonald’s rings up the highest average restaurant sales of any fast-food brand. Today franchisees own nearly 90 per cent of McDonald’s 14,339 US restaurants and 81 per cent of the 36,290 worldwide total. Mr. Easterbrook said last month that it aimed to raise the global franchise share to 90 per cent by 2018. But the ­symbiosis is inherently tense. McDonald’s tightly controls everything from how long franchisees cook their fries to what they can say to the media. While it wants franchisees to thrive, it also depends heavily on the royalties and rent it charges them. (While franchisees own the business and the equipment, they don’t own the building or land.) McDonald’s rent payments from franchisees globally grew 26 per cent over the past five years to $US6.1 billion last year, more than a fifth of its $US27.4bn ($35bn) in total revenue.

Meanwhile, US franchisees’ revenue slipped last year, to an average of just above $US2.4 million per restaurant, down from more than $US2.5m in 2013, according to restaurant consultancy Technomic. In a recent survey of 32 US franchisees who operate 215 restaurants, relations between franchisees and McDonald’s were rated the lowest in the more than 11 years that Mark Kalinowski, a Janney Capital Markets analyst, has conducted the survey.

“As a successful franchisor McDonald’s understands that one of its main responsibilities is to build and protect our brand — and to invest in the brand.

“We do this every day — balancing business conditions, investment and return goals, local market conditions and long-term growth strategies as we, and our franchisees, decide where and how to ­allocate resources for our businesses,” a McDonald’s spokeswoman said yesterday. Mr Easterbrook’s turnaround recipe depends in part on franchisees helping to pay for initiatives that could drive sales, such as the new customisable burger offering known as Create Your Taste, which the company said costs $US125,000 per restaurant, and all-day breakfast, which is being tested in some markets.

McDonald’s also says that 500 restaurants will get double-lane drive-troughs in the coming months.

Jeffrey Quick, senior partner with accounting firm Quick, Mitchell & Maish, who counts 150 McDonald’s franchisees as clients, says such costs can range from about a $US5000 investment to offer breakfast all day, a change that requires added food-preparation space, to upwards of $US650,000 to remodel a restaurant.

Many franchisees are trying to reduce labour costs by introducing self-order kiosks or cutting restaurant hours, according to Mr Quick and others. But that risks hurting customer service, which could worsen sales.

Source:  The Australian - 4th June 2015