Dissidents seek regulations

How the mightiest have fallen. It’s not that McDonald’s, the Oak Brook, Ill., burger giant is on the mat, but the poster firm for franchising, the company that could do no wrong, has stumbled badly…“McDonald’s is run by lawyers, accountants and bureaucrats, whose primary focus is on the stock market and building personal wealth at the expense of the franchisees,” says Consortium’s executive director, Dick Adams.

Franchise Times
August 1997

Dissidents seek regulations
Ellen Shubart

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McGrumble: Hugh Schmidt, a Vail, Colorado, franchisee for the past 20 years, observes, "I can compete with a Burger King down the block, but I can't compete with McDonald's, especially if it is my own."

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How the mightiest have fallen. It’s not that McDonald’s, the Oak Brook, Ill., burger giant is on the mat, but the poster firm for franchising, the company that could do no wrong, has stumbled badly.

And its franchisees reluctantly are saying, “We told you so.”

First, dissident franchisees gathered in Chicago before McDonald’s mid-May annual meeting to denounce the franchisor on a number of fronts, especially encroachment, which they say is sapping their equity.

Then, franchisee pressure killed a portion of Campaign 55 (named for the founding year of the franchise, 1955) that promised service within 55 seconds. The campaign was aimed at helping to rebuild the company’s same-store sales, which have been flat or increasing minusculely for the past year or so.

Finally, in early June, McDonald’s pulled the plug on the second part of Campaign 55, its 55-cent sandwich promotion, prompting declines in its stock price and a slew of articles in the national press analyzing the company’s “muddled” marketing efforts.

Through it all, franchisees, who own about 85% of the firm’s 9,000 or so domestic units, have suffered.

These marketing moves, which followed the earlier failure of the Arch Deluxe sandwich “for adults only,” have heightened franchisee concerns over slow or stagnant same-store sales, particularly in the face of continued expansion.

Franchisee discontent has been simmering since last fall, according to a confidential corporate survey that showed 78% of the 1,852 franchisees responding had a cash flow this year worse than in 1995 and that 69% believed their McDonald’s assets have lost value.

To members of the organized dissident franchisee group Consortium Members Inc., the moves emphasize that “McDonald’s is run by lawyers, accountants and bureaucrats, whose primary focus is on the stock market and building personal wealth at the expense of the franchisees,” says Consortium’s executive director, Dick Adams.

As a result, Consortium has joined forces with the Chicago-based American Franchisee Assn. (AFA) in pushing for national legislation that would, among other items, set strict rules for creating franchisee territories.

McDonald’s current franchise agreements do not include a provision for territories.

Consortium, Mr. Adams says, is a group in the hundreds that represents franchisees with about 1,000 units. (The company rejects this membership claim.)

Although six franchisees came to a May 21 press conference with AFA representatives, most Consortium members remain anonymous, they say to prevent retaliation by McDonald’s.

The dissident franchisees questioned the staying power of the 55-cent campaign before it was abandoned, noting that it had not taken of quickly enough.

“In my 13 years in business, most promotions have taken off within two weeks,” says Bob Srygley, owner of four franchises in Monticello, Ark.

The dissident franchisees blame the company’s rapid expansion for many of the firm’s problems. “We are our own worst competitor,” Mr. Srygley notes.

Adds Hugh Schmidt, a 20-year veteran with a McDonald’s in Vail, Colo: “I can compete with a Burger King down the block, but I can’t compete with McDonald’s, especially if it is my own. Today, the company’s motivation is to keep franchisees from getting equity.”

Says Susan Kezios, AFA president: “The problem of McDonald’s are systemic in franchise systems. (Franchisor) cannibalizing is across the board.”

The second “big issue” between franchisors and franchisees, she says is renewal of contracts. “The rewrite is usually materially different; there are guns held to people’s head: Sign or adios.”

The model legislation for which the AFA is lobbying would allow the freedom of association (to allow franchisees to join together in associations), the duty of good faith by a franchisor to a franchisee (which would preclude encroachment) and the prohibition of termination without good cause, Ms. Kezios says.

The legislation, she adds, was put together to encompass the recommendations approved by the White House Conference on Small Business in 1995.

Thus far proposed legislation had not made it to the floor of the U.S. House of Representatives, despite what Ms. Kezios calls “strong bipartisan support.”

Illustration: Schillerstrom, Crain's Chicago Business 1997


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Risks: Franchisee association, independent, American Franchisee Association, AFA, Encroachment (too many outlets in area), McStumble, McDonald’s of…, Renewing contract much tougher, Retaliation, Susan Kezios, United States, 19970801 Dissidents seek

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