Dive Brief:
- Frustrated by stagnant sales and tight cash flows, McDonald’s franchisees met on Wednesday in Tampa, Florida, to discuss forming an independent owners association, the Wall Street Journal reported. The company occasionally meets with advisory groups of franchisees nominated by their peers, but a wholly independent advocacy group would be a first for the iconic fast food chain.
- This National Owners Meeting could involve 20% of 14,000 U.S. franchises, many of which have spent thousands on renovations in recent years. McDonald’s runs only 800 domestic franchises today.
- “We believe it’s critical to come together to discuss the state of the business, unvarnished and unedited,” the meeting’s hosts said in a letter to franchisees, according to the Journal.
Dive Insight:
Last year, McDonald’s offered to cover 55% of store renovation costs as part of its “Experience of the Future” remodel push, which includes digital kiosks, enhanced dessert counters and extra coffee options. This more than the 40% the company typically covers for remodeling costs, but McDonald’s decided it needed the facelift after years of slow growth and various attempts to keep up with changing consumer demands.
Franchisees are feeling the heat during this transition. About 400 of them agreed at yesterday’s meeting to move forward with pressing one of the world’s largest companies for change, with many signing pledge cards to contribute $200 to the cause, according to the Wall Street Journal. The chain promotes certain informal owner-support groups, such as the National Black McDonald’s Operator Association and the Women’s Operator Network, on its website, calling its system “unparalleled in the quick-service restaurant industry" — but operators want solutions that will address the consequences of steep remodel costs and sluggish sales.
It costs $1 million to $2.2 million to open a McDonald’s franchise, according to the company. Potential owners must apply with at least $500,000 in “unencumbered liquid assets” and attend an intensive 12 to 18-month, part-time training program. Comparatively, a Subway charges a franchise fee of only $15,000 (though operators can expect startup costs to range from $100,000 to nearly $400,000. Wendy’s, on the other hand, requires millions in assets and a franchise fee of $40,000, and startup costs can rack up to $3.5 million.
McDonald's franchisees at 3,000 locations and counting have footed almost half of renovation bills, which can climb to $700,000. Add that to updates including all-day breakfast, curbside pickup, delivery, new refrigerators and made-to-order Quarter Pounders, and operators say sales growth fails to match those extra costs.
Earlier this year, McDonald’s said it lost 500 million sales to competitors since 2012, and vowed vast changes, including digital ordering and a new value menu, but guest count is slipping. The company also recently committed another $6 billion in an ambitious effort to transform 1,000 stores each quarter. The timing of the franchisee meeting could indicate a bumpy road in McDonald’s future, as owners struggle with higher wages, staffing shortages, newfangled menu items and a changing high-level plan.
Competitors, meanwhile, have not slowed down. In 2015 Wendy’s committed to opening 1,000 new restaurants by 2020, while Domino’s, Chick-fil-A, and Wingstop enjoyed some of the highest growth rates in 2016. McDonald’s still tops sales charts at a whopping $36.4 billion, twice as much as second-place Starbucks and more three times as much as Subway.
As the chain spurns the last of its corporate-run franchises, it should watch what happens with Jack-in-the-Box, whose franchisee association just voted to oust the California company’s CEO. McDonald's should be wary of overextending itself through its innovation campaign. Fresh concepts have inundated the quick-service marketplace to an extent that it’s almost impossible to stay abreast of every new consumer demand. The chain may be juggling too many projects at once — something that could sour its relationship with operators for the foreseeable future.
