McDonald’s Franchisee Economic Conditions: It’s Complicated

Last week, a wave of complaints emerged in the US McDonald (MCD) franchisee community when the franchisor notified franchisees that a series of new fees and subsidy cuts would be initiated in 2021.[1]  The fees and subsidy cuts,  about $12,000 per location, were described as last-minute and uncoordinated by senior McDonald’s franchisees I know. The fees include costs for the “Archways Opportunity” employee tuition program  (of which franchisees certainly benefit; moving it to jointly funded ) as well as costs for digital/IT.  These fees in total apparently amount to $170 million in 2021; it is not difficult to see a corporate PowerPoint slide showing this number being used during corporate budget development sessions.

What Happened?

What surprised many is that just before MCD Quarter 3 earnings in September is that the US franchisee mood was said to be extremely positive—the highest ever—as reported by Mark Kalinowski’s Quarterly McDonald’s franchisee survey.  On its November 9th earnings call, Kevin Orzan the CFO mentioned the US business returned to positive comps and grew company-operated margin dollars in the US.[2] While not franchisee numbers, it is a proxy.  While McDonald’s corporate and franchisee relationships have been up and down, there had been an improvement with more field focus under Joel Erlanger, the US McDonald’s Division President, and with the creation of the McDonald’s National Owner Association two years ago. However, franchisees do not like fees;  almost every franchisee I’ve ever talked to over time doesn’t see why the royalty paid isn’t good enough.

The New Mix of Required Franchisor CAPEX   

What has to be understood by all including the investment community and franchisees is that the essential nature of retail and restaurant business today requires heavy start-up investment CAPEX and recurring bands of follow-on CAPEX for IT platforms for digital sales and back-office systems. In the old days, it was enough for POS systems that were pollable. Coming out of the 2008/2009 recession, Starbucks (SBUX) and Panera (PNRA) were the innovators in stored value cards and loyalty, which lead those brands to recovery. Those features and more are now expected everywhere, especially post COVID-19.  These investments have to be centrally funded and managed.  This could put some franchisors into a bind if they have other use of funds programmed. Depending on the brand and store base, easily IT CAPEX should be 40-50% of the total capital budget or more in some years. Franchisors have some options:

1 2
View single page >> |

Originally published at wraysearch.com

How did you like this article? Let us know so we can better customize your reading experience.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.