The McDonalds Franchise: The Implications of Selling and Managing the Brand, Not the Product

'In business for yourself, but not by yourself.' That is the McDonalds franchise mantra. It implies a supportive partnership. 

But the relationship is far from equal and the restrictive nature of the economics means that franchisees have few options when it comes to managing the profitability of their enterprise.

Ironically, however, the very dimensions of that interaction may now threaten the corporate legal shield behind which McDonalds has attempted to manage its risk exposure, its financial results and the nature of the relationship with its business partners and 'associates.'

The courts have penetrated the corporate veil, exposing what many competitors have long observed about the way in which McDonalds imposes its demands while maintaining its deniability as a potential litigant.

The economics that drove the company's performance model for so long may now be undermining it. By forcing franchisees to apply  relentlessly downward pressure on the cost of employment and, in turn, by contributing to a broader societal decline in household income, McDonalds finds itself facing chronically disappointing financial results and, at the same time, increasing pressure to improve compensation. This, in turn, may well have damaged a once unassailable brand by raising questions about perceptions of operating philosophy that have also dogged that other low-end employer and merchant, Walmart. The courts become involved when the situation becomes sufficiently insupportable that questions of viability have to be adjudicated since no other alternative appears effective.

The reality may be that the company was too busy managing its brand and that process that feeds it to notice how its own actions were undermining that value it thought it was creating in perpetuity. JL

Cathy O'Neill reports in the Mathbabe:

By the franchise contract, the money available to a franchise owner is left over after they pay McDonalds for advertising, buy all the equipment and food that McDonalds tells them to from the sources that they tell them to, and after they pay for rent on the property (which McDonalds typically owns)
I’ve been fascinated to learn all sorts of things about how McDonalds operates their business, as news broke about a recent NLRB decision to allow certain people who work in McDonalds to file complaints about their workplace and name McDonalds as a joint employer.
That sounds incredibly dull, right? The idea of letting McDonalds workers name McDonalds as an employer? Let me tell you a bit more. And this is all common knowledge, but I thought I’d gather it here for those of you who haven’t been following the story.
Most of the McDonalds joints you go to are franchises – 90% in this country. That means the business is owned by a franchisee, a person who pays good money (details here) for the right to run a McDonalds and is constrained by a huge long list of rules about how they have to do it.
The franchise owner attends Hamburger University and gets trained in all sorts of things, like exactly how things should look in the store, how customers should be funneled through space (maps included), how long each thing should take, and how to treat employees. There’s a QSC Playbook they are given (Quality, Service, and Cleanliness) as well as minute descriptions of how to organize their teams and even the vocabulary words they should use to encourage workers (see page 24 of the Shift Management Guide I found online here).
McDonalds also installs a real-time surveillance system into each McDonalds, which can calculate the rate of revenue brought in at a given moment, as well as the rate of pay going out, and when the ratio of those two numbers reaches a certain lower bound threshold, they encourage franchise owners to ask people to leave or delay people from clocking in. Encourage, mind you, not require. They are not the employers or anything remotely like that, clearly.
Take a step back here. What is the business model of a franchise? And when did McDonalds stop being a burger joint?
The idea is this. When you own a restaurant you have to deal with all these people who work for you and you have to deal with their complaints, and they might not like the way you treat them and they might organize against you or sue you. In order to contain your risks, you franchise. That effectively removes all of those people except one, the franchise owner, with whom you have an air-tight contract, written by a huge team of lawyers, which basically says that you get to cancel the franchise agreement for any minor infraction (where they’d lose a bunch of investment money), but most importantly it means the people actually working in a given franchise work for that one person, not for you, so their pesky legal issues are kept away from you. It’s a way to box in the legal risk of the parent company.
Restaurants aren’t the only business to learn that it’s easier to sell and manage a brand than it is to sell and manage an actual product. Hotels have been doing this for a long time, and avoid complaints and legal issues stemming from the huge population of service workers in hotels, mostly minority women.
For a copy of the original complaint that gave the details of McDonald’s control over workers, read this. For a better feel for being a McDonalds worker, please read this recent Reuters blog post written by a McDonalds worker. And for a better feel for being a McDonald’s franchise owner, read this recent Washington Post letter from a long-time McDonalds franchise owner who thinks workers are being unfairly treated.
Does that sounds confusing, that a franchise owner would side with the employees? It shouldn’t.
By nature of the franchise contract, the money actually available to a franchise owner is whatever’s left over after they pay McDonalds for advertising, and buy all the equipment and food that McDonalds tells them to from the sources that they tell them to, and after they pay for insurance on everything and for rent on the property (which McDonalds typically owns). In other words the only variable they have to tweak is the employer pay, but if they pay a living wage then they lose money on their business. In fact when franchise owners complain about the profit stream, McDonalds tells them to pay their workers less. McDonalds essentially controls everything except one variable, but since it’s a closed system of equations, that means the franchise owners have to decide between paying their workers reasonably and going in the red.
That’s not to say, of course, that McDonalds as an enterprise is at risk of losing money. In fact the parent corporation is making good money ($1.4 billion per quarter if you include international revenue), by squeezing the franchises. If the franchise owners had more leverage to negotiate better contracts, they could siphon off more revenue and then – possibly – share it with workers.
So back to the ruling. If upheld, and there’s a good chance it won’t be but I’m feeling hopeful today, this decision will allow people to point at McDonalds the corporation when they are treated badly, and will potentially allow a workers’ union to form. Alternatively it might energize the franchise owners to negotiate more flexible contracts, which could allow them to pay their workers better directly.