From franchising’s infancy through today’s dominance of the business model throughout our economy, McDonald’s has been seen as the gold standard. It has been the leader in innovation, profitable operations, and keeping its dirty laundry out of the press. Indeed, in the first 25 years that I practiced, I talked to a grand total of two McDonald’s franchisees who had issues, and both were rapidly resolved to everyone’s satisfaction. McDonald’s had a laser-like focus on keeping its franchisees, if not completely happy, at least satisfied with their performance. Recently, however, the bloom has finally seemed to fall off the rose.
The genesis of the current issues appears to have happened in approximately 2017, when McDonald’s rolled out its revised remodel plan, known as the “Experience of the Future.” Simultaneously, the company was moving into its new headquarters, which coincided with a significant decrease in the number of senior personnel employed by McDonald’s to support its franchisees. These two moves, along with falling profitability at the time, led to the formation of the National Operators Association (NOA). That effort was led, in significant part, by McDonald’s mega-owner Blake Casper, the third-generation owner of Caspers Company (a Florida-based company that operated 60 McDonald’s restaurants in and around Tampa and Jacksonville.) The pandemic seemed to temporarily slow the de-evolution of the relationship between McDonald’s and its franchisees, in significant part because everyone was making a lot of money. However, negative relations began accelerating again in mid-2021 when a significant dispute over tech fees broke out between McDonald’s and its franchisees. That matter was ultimately resolved when the company backed down from its originally proposed requirements.
However, in the last couple of months, McDonald’s has made a move that has inflamed the franchisee rank and file. More specifically, McDonald’s has significantly tightened its requirements for renewal of existing franchisees, requiring substantially more stringent economic requirements than those asked for new franchisees. Simultaneously, it has reportedly lowered the requirement for those wanting to get into the McDonald’s system. This strategy is seen as a slap in the face to existing owners.
Add to this toxic stew McDonald’s recent uptick in the use of its right of first refusal to buy out transferring franchisees, including Blake Casper and Caspers Company (a move that is seen by many as McDonald’s vehicle for getting rid of lower grandfathered leases in favor of putting in new franchisees who will pay a higher amount to McDonald’s for their leasehold rights), and you can begin to understand the turmoil. And the trend is accelerating, as a large volume of franchisees are electing to get out of the McDonald’s system at this point. (For instance, it has been reported that in 2021, 13% of the franchised locations changed hands, compared to only 8% in the Taco Bell system.)
These moves all led the National Black McDonald’s Operators Association (NBMOA) to pass a vote of “no confidence” in McDonald’s CEO Chris Kempczinski in June of this year. After that, it was reported that the NOA surveyed its membership, and responses by more than 600 operators indicate extreme operator anger over the state of affairs. Further, the NOA is apparently also considering a vote of no confidence in CEO Kempczinski and McDonald’s USA President Joe Erlinger.
What to make of all of this for those who are in franchising but outside of the McDonald’s world?
McDonald’s has claimed that most of these efforts, particularly the ones related to the purchasing and reselling of restaurants, and the increased requirements with respect to renewal, are part of its diversification effort, one of the chain’s primary goals. Many franchisors have the same goal—to increase the diversity in their franchisee body—a laudable goal indeed. But one is left to wonder, particularly in light of the vote of no confidence by the NBMOA, whether, in McDonald’s case at least, this goal is being used for ulterior purposes.
Recently, I wrote about the increasing attention on franchising by federal and state regulators and lawmakers (Ronald K. Gardner, A Rebalance of Power, NYLJ (March 20, 2022)). With this sort of turmoil going on at McDonald’s, with the potential to bubble over even further into other systems, one might be left to wonder whether the protections that exist in some states over a franchisor’s inability to non-renew franchisees unless it has good cause to do so, might become more widespread. Indeed, in states with such requirements, McDonald’s would probably be hard-pressed to explain to a court or arbitrator how it requires higher standards to sign a new agreement with an existing franchisee than with one who is not in the system. My guess is that this is a dispute we will see play out in the future if McDonald’s sticks to its guns on this new policy with respect to renewal. If McDonald’s were to win that fight, however, I feel certain that other franchisors will feel emboldened and become more aggressive in their ability to get rid of franchisees that they are unhappy with through the renewal process than they currently do.
In the meantime, whether McDonald’s is a harbinger for other systems or whether or not it can get back to being the gold standard is something we will all have to watch. A vote of “no confidence” sends an interesting signal. Obviously, significant stress among franchisee owners sends an alarming signal to franchise management, owners and investors. But it is a step short of all out war (e.g., some sort of lawsuit against the franchisor based on some real (or at least colorable) claim for breach of contract, the covenant of good faith and fair dealing, or some other unfair business practice). Keen watchers of franchising will be paying close attention here to both sides, because like it or not, where McDonald’s goes, many other franchisors follow.
Ronald K. Gardner is a partner at Dady & Gardner, P.A. He limits his practice to the representation of franchisees, dealers and distributors when they are in disputes with their franchisors, manufacturers and suppliers.
