In what some may consider a desperate move, McDonald’s is refranchising 4000 stores across the nation in order to bring in revenue.
McDonald’s Founder Ray Crock used to day that “We are in the real estate business; not the hamburger business.” Crock alluded to the fact that one of McDonald’s core strategies was to sell locations to franchisees. Now the restaurant chain wants to sell almost all of their corporate owned stores to franchisees. McDonald’s is one of the companies that has pioneered the franchise system which many fast food rivals have copied. The reason for its success is that the franchise system has worked in the past and McDonald’s is betting that it will again.
The franchise system worked well for McDonald’s for one reason: everybody won. McDonald’s would make a profit from the franchisee by charging them an initial investment, rent in the form of a percentage of revenue (this can run between 8.5% up to 15% depending on the location of the franchise) and a 4% royalty on sales. Franchise owners also contribute to national and local advertising funds, as well as pay for new equipment or any remodels to their restaurants. All of this may seem like a large amount of money, but franchisees would recoup their investment as they racked up sales. For years this partnership worked and owning a McDonald’s franchise was a dream for many young entrepreneurs. Unfortunately that is a dream that is shared by fewer people today.
One of the constants in life is change. Everything changes in the world including tastes. There was a time when everybody flocked to McDonald’s for a burger, fries and a Coke. Now health conscious diners are opting for low calorie meals that can be found at fast casual restaurants like Applebee’s Chipotle and other fast casual restaurants. With the exception of chains like Blimpie, Quiznos and Subway, fast food chains have never been able to capture the healthy dining market. One look at the McDonald’s menu will tell you that very little has changed since 1985. Yes, McDonald’s has tried to offer new products to their customers, but none have had the staying power of the Big Mac, Quarter Pounder with Cheese and to a lesser extent the McRib. Some will argue that McDonald’s has found success with its line of McCafe drinks, but for some franchisees, the cost involved with making these drinks like longer wait times and expensive equipment outweigh the profits. Plus many franchisees are feeling the pinch of the recent debate over the demand for higher wages. McDonald’s has raised the hourly rate for crewpersons to just over minimum wage at their corporate locations, but given the fact that McDonald’s profits are in the billions, a salary increase will hurt them less than a franchisee with only two or three restaurants. Yet by increasing those salaries many franchise owners felt an obligation to follow suit despite the fact that it would severely impact the bottom line of those franchises. All of these factors have created a high level of friction between franchise owners and McDonald’s home office which could severely impact McDonald’s refranchising efforts.
Over the last six months many franchisees have begun to speak out against McDonald’s claiming that the decisions made by McDonald’s top executives have impacted the profits of many franchises. Decisions like marketing unsuccessful products and even some successful ones have forced franchise owners to spend more money than they have had to in the past. When McDonald’s announced that their restaurants would start serving breakfast all day, many franchisees fretted over the expense of putting in another grill specifically for eggs and the cost if hiring extra crewmembers. While all day breakfast has had some promising results, many franchise owners are still unsure of whether this will help their profits in the long run. Many franchise owners have opted to sell their locations and move on to other ventures because of the problems associated with McDonald’s changes, the highest profile franchisee being Al Jarvis of Hastings, Michigan, who opted out shortly before his 50th anniversary with McDonald’s. With problems like these it has to make people wonder if there is anyone who would want to take a chance on a McDonald’s franchise.
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