McDonald’s franchisees balk at costly bill to upgrade stores

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Photo by Patrick T. Fallon / AFP via Getty ImagesMcDonald’s Corp.’s ambitious plan to overhaul its restaurants and menu is sparking angst among United States franchisees facing upgrades that will cost at least US$800,000 per location.THIS CONTENT IS RESERVED FOR SUBSCRIBERS ONLYSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.SUBSCRIBE TO UNLOCK MORE ARTICLESSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.REGISTER / SIGN IN TO UNLOCK MORE ARTICLESCreate an account or sign in to continue with your reading experience.Access articles from across Canada with one account.Share your thoughts and join the conversation in the comments.Enjoy additional articles per month.Get email updates from your favourite authors.THIS ARTICLE IS FREE TO READ REGISTER TO UNLOCK.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one accountShare your thoughts and join the conversation in the commentsEnjoy additional articles per monthGet email updates from your favourite authorsSign In or Create an AccountSome franchise owners say they were surprised by the price tag announced two weeks ago for the multiyear initiative to improve food quality, service and efficiency. They’ve been discussing concerns about the project’s cost and lack of details in a series of recent meetings, including some organized by an elected association representing U.S. operators, according to people familiar with the matter who requested anonymity because they weren’t authorized to speak publicly.This advertisement has not loaded yet, but your article continues below.McDonald’s needs the backing of its franchisees to help restore investor confidence that has faltered this year. From a peak in late February through the end of September — around the time chief executive Chris Kempczinski unveiled his “Next” business plan — the company’s shares plunged 32 per cent, squandering nearly US$80 billion of market value in just a seven-month span. The stock is on course for its worst annual performance since 2002.Breaking business news, incisive views, must-reads and market signals. Weekdays by 9 a.m.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Posthaste will soon be in your inbox.We encountered an issue signing you up. Please try againKempczinski is billing the new initiative as critical to gaining market share as diners become choosier and competition intensifies. The company is grappling with slowing U.S. sales, in part due to a value lineup that didn’t perform as expected last quarter. The company is working to remedy that with a new approach. Rising costs of beef, labour and equipment have been pressuring restaurants, too. One of Wendy’s Co.’s largest franchisees filed for bankruptcy last month, underscoring the squeeze on fast-food operators.The upgrades are expected to cost U.S. franchisees about US$800,000 per location to implement over several years, according to company estimates. Operators are already on the hook for scheduled remodels that cost at least US$400,000, bringing the total tab they’re facing to about US$1.2 million per restaurant. McDonald’s has pledged about US$8.5 billion in cash and rent relief to offset part of those costs, with the level of support varying by franchisee.This advertisement has not loaded yet, but your article continues below.McDonald’s franchisees were slated to tour a prototype of what restaurants could look like under “Next” in the coming months, but they persuaded the company to put off those visits until next year to focus on the immediate traffic concerns, according to people familiar with the matter. Restaurant operators say they’re worried about taking on more debt to pay for the changes, and they’re seeking more details from McDonald’s about what kind of sales lift they can expect.“Our suspicion is that franchisees will look to negotiate the price tag down ~20-40 per cent as they accept certain elements of the plan and push back on others,” Guggenheim Securities analyst Gregory Francfort wrote in a note to clients.McDonald’s said in an emailed statement that it remains confident in its plan. The company agrees that additional information is important for operators, and it’s set up task forces with franchisees and company leaders to review the financials and iron out the details.Franchisees are considering their next steps, the people said. Operators usually channel their concerns and requests through the National Franchisee Leadership Alliance, the elected body that communicates with McDonald’s corporate leaders.This advertisement has not loaded yet.This advertisement has not loaded yet, but your article continues below.McDonald’s shares were little changed at 12:46 p.m. in New York on Tuesday. More than a dozen analysts have cut their price targets for the stock since late September, when McDonald’s flagged that U.S. sales in the third quarter would be “slightly negative.”This isn’t the first time that tensions have come between McDonald’s and its franchisees. In 2017, the chain asked operators to formally commit to a multiyear U.S. revamp that included restaurant remodels, kiosks, mobile ordering and delivery. More than 85 per cent of U.S. franchisees signed on, but owners later pushed back against the cost and pace of the upgrades.Amid those tensions, franchisees formed an independent advocacy group in 2018 that helped persuade McDonald’s to give operators more time for remodels.McDonald’s has also aligned franchise owners around major initiatives. In 2020, the company launched a strategy focused on marketing, core menu items and digital conveniences such as delivery and drive-thru. Global orders rose five per cent in 2022, which McDonald’s credited in part to the project.This advertisement has not loaded yet, but your article continues below.The “Next” plan aims to turn McDonald’s into more than a stop for a quick, cheap meal. The idea is to redesign restaurants to be more open and to bring back playful elements lost in previous remodels, while streamlining kitchens so staff can prepare meals more efficiently.McDonald’s has said the program will help operators save about US$100,000 in annual cash flow thanks to initiatives such as automated order-taking, which should free up people and cash for other parts of the project. The company is putting up the US$8.5 billion to help franchisees get the investment returns of at least 20 per cent that they’ve historically expected, Kempczinski said in an interview last month.“We’re willing to partner with the franchisees as a demonstration of our faith,” he said. Kempczinski added that the company wasn’t able to share the financial details of the plan in advance with franchise owners due to disclosure rules.We apologize, but this video has failed to load.This advertisement has not loaded yet.Notice for the Postmedia NetworkThis website uses cookies to personalize your content (including ads), and allows us to analyze our traffic. Read more about cookies here. By continuing to use our site, you agree to our Terms of Use and Privacy Policy.