Dive Brief:

• A group of at least 10 current and former McDonald's franchisees has retained a law firm to look into allegations of discrimination at the chain, including financing mechanisms and revenue distributions, according to Business Insider. The investigation is expected to conclude in just a few weeks and a claim "could be filed" at that time.
• McDonald's released a statement that it is not aware of a potential filing and is unable to comment on the investigation. "It is McDonald's core belief that diversity and an inclusive and respectful workplace makes us stronger, and as a franchised business, the success of our organization depends on all franchisees succeeding," the statement said. 
• This investigation comes on the heels of a federal lawsuit filed against the company in January alleging racial discrimination. That lawsuit claims the company under former CEO Steve Easterbrook, current CEO Chris Kempczinski and zone president Charlie Strong pushed out African Americans from senior leadership positions and pressured African American franchisees to leave the system.

Dive Insight:

In its statement, McDonald’s touted its belief in diversity, noting that "the company has a proud history spanning across decades of creating significant opportunities for entrepreneurship and economic growth for small business owners across the country, including McDonald's franchisees of many diverse backgrounds."

But the company has faced egregious allegations of late that challenge this notion. The January lawsuit, for example, claims McDonald's carried out "ruthless humiliation and expulsion of highly qualified African Americans," and states the company "declared war against the African American community." Further, the lawsuit also accuses the company of abandoning its marketing efforts toward African American consumers, which led to declines in black customers, and claims the percentage of African American customers slipped to 14% last year from its historical rate of 20%.

Notably, those allegations are inconsistent with McDonald's 2019 launch of Black & Positively Golden, its largest African American campaign in 16 years. However, this latest investigation could illustrate a pattern at the company, particularly if it yields another lawsuit.

This would pile on the reports that began surfacing in early December, when Business Insider wrote that the number of black franchisees declined from 304 in 2008 to 222 in 2017 and now make up less than 200 of the company's 1,700 franchisees. The story also reported that the average cash flow of black franchisees is significantly lower than its white counterparts, and that the gap has grown. In 2012, the cash flow disparity between black and white franchisees was roughly $24,600 and in 2017, it was about $60,600.

Other restaurant brands have endured racial discrimination suits, including Waffle House, Buffalo Wild Wings, Cheesecake Factory and Denny's, the latter of which settled for $54 million in 1994. That chain, however, has come a long way, having launched a comprehensive marketing campaign in 2019 focused on diversity, for example. 

But the most recent and high-profile example here is Papa John's. In the summer of 2018, Papa John's founder (and then-CEO) John Schnatter was ousted over his use of racist language. The fallout was remarkable — Papa John's endured a steep drop in sales and valuation while navigating lawsuits from its founder. But that company has made tremendous strides toward rectifying its reputation, including hiring its first chief people and diversity officer in Marvin Boakye and its first chief of diversity, equity and inclusion, Victoria Russell. 

Since then, Papa John's has put into place a number of initiatives, including the creation of Employee Resource Groups that host talks to improve with diversity, equity and inclusion training. Indeed, there's a business case here. New Nielsen data shows that African Americans outpace spending nationally, for example, and since making these changes, Papa John's shares are trading more than $25 higher than this time last year.

McDonald's situation doesn't parallel Papa John's problems. These allegations aren't as high profile as a founder/spokesperson's public ouster, and therefore could be insulated from a similar fallout. But it's still critical for the company to ensure its franchisees and customers feel supported, especially given existing franchisee tensions. Any erosion of trust there could quickly affect not just sales, but reputation.