McDonald’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. Some 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. 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. Kempczinski 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. 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. 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. 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 sell-off hits 30% as Big Mac inflation spurs pushbackFrom McNuggets to Shake Shack: Why brands test ideas in London 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. Bloomberg.com
McDonald’s franchisees balk at costly bill to upgrade stores
