McDonald's Owner/Operators Temperature Check
Recently I gained additional perspective on the issues and discontent in the McDonald's U.S. owner/operator community. McDonald's (MCD) had a rough year with a new CEO, softened sales growth, executive turnover, franchisee unhappiness and considerable attention from the press on their problems.
It is striking to now see the depth and breadth of this bellwether chain's franchise problems. After reviewing a summary of issues and remarks by McDonald's franchisees, I think that both franchisor and franchisees have work to do to better their circumstances and the brand.
- First, there has to be basic respect of the franchisee's place and importance. Franchisees are investors too, and deserve the same level of respect as MCD common stock shareholders. The report of franchisee concerns that I have seen show a growing lack of confidence with McDonald's. Franchisees quote replies by franchisor employees to their problems such as, "So what if you don't make money in the first ten years?" And then those franchisor representatives add that there is a line of franchise buyers who would love to take the disgruntled franchisee's place. This deaf ear to owner-operator problems is ill served and contrary to McDonald's founding values.
- Having considerable angst regarding the growth of the dollar menu, franchisees must be aware that as a publicly traded entity, MCD has a pass fail same store sales bumper sticker put on it by Wall Street. Either the number is high enough or it is not. Either low prices drive traffic or it does not. If not, MCD stock price plunges. What is encouraging is that McDonald's does have the capability to offset the low price effect that hammers down franchisee profits by lowering rents, which it did in the old days, to help new franchisees survive.
- Franchisees have expressed the hope to get back to 8.5% rents, with some paying now 11 to 12% of revenue to MCD for its company-owned property leases. The problem is that restaurant economics were never built to support astronomic 12% rents. That's just too high. MCD could and should find restaurant G&A savings to offset the rent spread reductions.
- Finally, an appeal to both sides. It is easy to complain. Solutions should be offered by franchisees and the company alike and properly vetted through the McDonald's OO Committee structure. Franchisees speak about the plethora of advisory committees as a maze where ideas lose their way. That's a loss for McDonald's. Working together can work and has worked at McDonald's in the past.
One can only wonder — if these problems are at play with stellar McDonald's, the biggest restaurant chain in the U.S. by sales, then what is underway with lesser franchise networks?