Long considered to be a blue chip investment for small-business owners, McDonald’s franchises are experiencing shrinking sales coupled with pricey demands for renovation and equipment upgrades by the McDonald’s Corporation. The Wall Street Journal elaborates:
“Steve Easterbrook, the fast-food chain’s new chief executive, in recent weeks has spelled out several revival initiatives that require franchisees to invest further, including offering more customizable burgers and building more double-lane drive-throughs. He also wants to get them to buy more restaurants from the chain, and is raising wages at company-owned restaurants in the U.S.—creating pressure on franchisees to follow suit.
Those initiatives are aggravating discontent among some U.S. McDonald’s owners who already are struggling with hefty debt accumulated in a campaign of restaurant upgrades over the past decade, according to franchisees and lawyers and consultants who work with them. Shrinking sales in recent years undermined the expectations built into those investments, leaving the franchisees with higher levels of debt than the chain prefers.
But the symbiosis is inherently tense. McDonald’s tightly controls everything from how long franchisees cook their fries to what they can say to the media. While it wants franchisees to thrive, it also depends heavily on the royalties and rent it charges them. (While franchisees own the business and the equipment, they don’t own the building or land.) McDonald’s rent payments from franchisees globally grew 26% over the past five years to $6.1 billion last year, more than a fifth of its $27.4 billion in total revenue.
Meanwhile, U.S. franchisees’ revenue slipped last year, to an average of just above $2.4 million per restaurant, down from more than $2.5 million in 2013, according to restaurant consultancy Technomic Inc.”
Everybody hates ‘burger flipping’ jobs. But the truth is that for low skilled and poorly educated workers, or workers who happen to have checkered work histories, it’s flip burgers or nothing. The plight of McDonald’s workers protesting for increased wages has been well documented, but it is interesting to see economic pressure now placed upon the franchise owners that employ these workers. The situation is not favorable for these franchise owners, as pressures on successful business now range from: changing consumer tastes, corporate demand to continuously upgrade franchises, customers expecting things to always be bigger, brighter, fresher, and shinier, all in addition to rising labor costs that have now put these franchise owners in quite a squeeze.
The fact that a traditionally strong corporation such as McDonald’s is having difficulties providing a successful operating environment for its franchises points to one of the unpleasant, but important, truths: that in a service economy, business is inherently more volatile. John D. Rockefeller was not only able to sell oil, but he also owned the oil wells, the refineries, and that distribution system that he used. After almost 150 years, Standard Oil and its descendants still remain massive presences in the world economy. Unfortunately for McDonalds, their business ultimately depends upon consumer taste. If a competitor comes along with a better burger, or consumers get tired of burgers and fries—it will be game over for the golden arch.