McDonald’s faces franchisees decrying ‘destructive path’

BLOOMBERG

McDonald’s Corp is facing rising unrest among certain US franchisees — a potential stumbling block as the burger chain plots aggressive expansion.
Squeezed by higher costs and grumbling at new operating rules, franchisees invited to a meeting with the company’s board will press their case in person. The session will give US operators “an opportunity to share with the board of directors why we believe we are on a destructive path,” one group of owners said in an emailed newsletter to about 1,000 members.
The discontent represents a risk to McDonald’s growth plans, said John Gordon, principal at Pacific Management Consulting Group, a restaurant and franchisee adviser. If this unrest leads longtime franchisees to “hang up the towel,” then it’s an “inherent operating risk” for McDonald’s because replacement franchisees may not be as well capitalised, he said. Newer franchisees would likely face higher borrowing costs, he added.
McDonald’s says that its longstanding relationships with lenders allow the company to connect franchisees with competitive financing options for growth. In an emailed statement, it acknowledged that inflation trimmed profitability for franchisees last year, but said cash flow has risen 35% per restaurant on average since 2018 and long-term returns are “strong.”
Owners’ increasingly vocal criticism comes amid a sales boom that has bolstered McDonald’s shares and won over Wall Street, where 29 analysts recommend buying the stock, versus only a single sell rating. Same-store sales have grown in recent quarters as customers flock to the chain’s affordable options and a menu that includes a revamped chicken sandwich. The company attributes gains to better staffing as well as improvements to operations and marketing.
McDonald’s plans to open 1,900 new locations this year worldwide, including additions in its home market. It announced the hire of Tabassum Zalotrawala away from Chipotle Mexican Grill Inc to serve as US chief development officer and help lead the efforts.
“Having spent the past five years investing our capital and energy in modernising our business, we’ve earned the right to build new restaurants and set aggressive goals,” the company said in the announcement.
But as it eyes the expansion, management is having trouble winning over franchisees, who operate 95% of US locations which generate about 70% of revenue in the country.
Certain franchisees are concerned by the unrelenting climb in wages and costs for ingredients and packaging.