Giveaways anger McD's franchisees

McDonald's execs have been pushing discount and free samples all year and even followed up with franchisees to ensure they comply.
June 16, 2008

Giveaways anger McD's franchisees
David Sterrett

McDonald's franchisees, squeezed by soaring costs, are balking at the burger chain's strategy of giveaways and deep discounts to boost sales.

A panel of McDonald's owners that sets national advertising policy for all 14,000 U.S. restaurants is pushing back against a company plan to give away chicken sandwiches in August in light of rising food and energy costs, according to interviews with franchisees and documents from their leadership.

Resistance to the promotion reflects rising tension between McDonald's and its franchisees as the economy tilts toward recession and inflation accelerates. McDonald's, which collects royalties from restaurant owners based on a percentage of sales, encourages promotions to keep sales from sliding as the economy slows. But promotions squeeze the profits of franchisees already battling rising food costs.

The issue threatens to create the first serious rift between Oak Brook-based McDonald's Corp. and franchisees since the company's turnaround of the past five years ushered in an era of mutual goodwill. And it comes at a time when the fast-food giant is asking franchisees to dip into their dwindling cash flow to help pay for a costly attempt to compete with Starbucks in premium coffees and other beverages, an initiative that's off to a slow start. The company also is asking owners to keep low-profit dollar menus intact.

"There is no question the tension is greater now than it has been in some time," says Ed Bailey, who owns 60 McDonald's restaurants in northern Texas and is suing the company over an unrelated dispute.

The average cash flow per restaurant, which is the franchisees' profit before taxes and debt, was down about $5,000, or more than 7%, for the first quarter, according to a memo this month from a company official to franchisees. McDonald's expects paper and food costs to rise between $32,000 and $35,000 per restaurant this year, about 1.5% of sales, according to a memo sent last month from a franchisee leader to colleagues. Most of these costs are falling on franchisees, who run 85% of McDonald's restaurants.

The owners also have to shoulder the burden of promotions, such as the free McSkillet burritos for two days in February, free coffee Mondays in some markets and $1 large fountain drinks at many restaurants this summer.

Mr. Bailey says he supports sampling new products but estimates that on May 15 it cost franchisees about $600 per restaurant to give away the new Southern Style chicken sandwich and biscuit with drink orders. He says that despite a 7% increase in sales last year at his restaurants, his profits remained relatively flat because of the higher costs.

Mr. Bailey was part of a group of Texas franchisees who voted against spending local advertising money to promote the dollar menu in September.

One franchise leader told colleagues in a memo this month that she expects the national group of owners to nix the August promotion in light of the dollar drinks and expense of the first chicken giveaway in May. The panel has yet to make an official decision.

McDonald's execs have been pushing discount and free samples all year and even followed up with franchisees to ensure they comply.

In the middle of the two-day burrito giveaway, Jan Fields, chief operating officer of McDonald's USA, sent a memo to all franchisees directing them to cooperate with the promotion, noting complaints from customers that some restaurants weren't making the burritos available to all.

McDonald's declines to comment. Leaders of the franchisee group did not return phone calls.

Steve Biddle, a McDonald's owner with five locations in Oklahoma, says franchisees aren't pushing back — rather they are making an "intelligent business decision" about the August chicken sandwich promotion. He says he expects there will be a compromise between the owners and the company but couldn't provide details.

"The challenges are unprecedented, and I've been in business for 40 years," Mr. Biddle says. "We just have to be sure we are doing the best we can with the money we have to spend."

©2008 by Crain Communications Inc.

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