The contrast between McDonald’s performance and its internal strife at the moment could not be more pronounced.
The company is on a roll right now. The Travis Scott promotion was an unquestioned success. Spicy Chicken McNuggets were also a success. Breakfast appears to be back despite Wendy’s. The McRib has generated positive buzz. Service speed has thrived because of menu cuts and other operational changes.
And yet franchisees, almost to a person, staged an uprising that seemingly took even corporate executives aback, after an email earlier this month informed the operators of a pair of new fees—one to cover a technology debt and another for a tuition program—along with the end of the Happy Meal subsidy.
The amount per location, $12,000, is seemingly small compared to the likely-over-$3 million the average McDonald’s unit makes in revenue. But to the owners the fees, and the way they were presented, are very much a big deal.
As a result, franchisees are avoiding some non-essential meetings with company executives while also reconsidering value in protest of the changes. And they are unusually united on the issue: It is rare to see 95% of the franchisee base agree on almost anything, let alone a key protest against the company.
The dispute highlights the single biggest point of contention between a franchisor and the investors who run its restaurants: Where they generate funds.
Franchisors make money off the top line. They collect a percentage of sales for royalties and rent. They want to generate strong sales.
Franchisees need to generate a profit off those sales.
The difference between those priorities can lead to a lot of controversy, as happened over the summer when Subway franchisees pushed back on that chain’s effort to bring back the $5 Footlong sub in a 2-$10 promotion.
Fees, requirements and other requests also make it more difficult for operators to make a profit. One McDonald’s franchisee noted that the $170 million in fees and subsidy cuts amount to a $1 billion transfer of wealth, considering the value multiple those earnings represent.
Another issue is the technology. McDonald’s email noted that operators will pay more for technology next year to fund a $70 million debt owed to the company for those services—the debt stems from the shift in payments to every month from every six months. Operators do not believe there is such a debt.
Yet that, too, highlights a pain point. Franchisees’ technology fees are 10 times what they were a decade ago, an increase stemming from the addition of new types of services and capabilities, among other things. Paying that additional amount reveals a sore point with franchisees over that cost increase.
McDonald’s has spent a lot of money in recent years to upgrade technology, an increasingly important element in the fast-food business. Numerous brands are spending heavily to upgrade technology, and the Chicago-based burger giant has to at least keep pace—though it is at the forefront of areas such as drive-thru technology, which is completely unsurprising.
Still, some operators have questioned what they get for their fees. Mostly, they say the costs illustrate the challenges that come when a franchisor is also an important vendor.
We believe this issue likely gets resolved. Neither side wants to disturb what has been working out well for the brand during a pandemic.
Yet franchising depends on the relationship between a brand and its operators, and that relationship is often tenuous and difficult given their different priorities. That relationship can turn sour in a hurry, even when things are seemingly going well.
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