Strong franchisee relationships are usually associated with, not surprisingly, concepts showing strong same-store sales, like WING and DPZ. When you see fraying franchisee relationships traditionally tied to weak same-store sales, like Tim Hortons, those issues do get resolved overnight. We received some interesting comments from sharing the recent NOA letter. The consensus seems to think that that letter and the Wall Street Journal Story on "Franchising Relationships Fraying" is a massive understatement. Considering MCD was a Covid winner, 2021 might have several challenges for the company, including its franchisee related issues. To be consistent with our thought process on space and franchisee related issues, we remove MCD from the LONG bias list.
Over the years, I have seen many blog posts about franchisees' related issues, but nothing like what you are about to read. "The owners/operators in the MCD system are very unhappy with the company trying to "manage earnings" on the back of franchisees during a pandemic. I don't usually share comments from MCD blogs, but this letter from a franchisee is so visceral I think it's worth reading. It's also worth keeping perspective on this when we hear from the company when it reports 4Q earnings and talks about the recovery and the health of its franchisees.
A McDonald's owner/operator wrote the following:
Reading the attached article "The Franchise Relationship That Powers Small Business is Fraying" from the WSJ is omniscient in the overall assessment of what is going on in the world of Franchising right now; however, in typical media fashion, it only touches the surface of the issues. To make it more newsworthy, it seems to suggest a great deal of the problems are recent and a result of the coronavirus pandemic. They are in touch with a much bigger story. For years to any casual observer, the world of Franchising, the original concept of Franchising, and the relationships between the franchisor and franchisees have more aptly been "hacksawed" than frayed, especially in the world of QSR's.
Franchising disputes and franchisor abuses of power have become like following politics these days. No matter how bad the behavior, how big the lies or deception, it seems like the world is all too frantic and busy to realize what is going on until something goes nuclear. Read any restaurant publication from Nation's Restaurant News to Restaurant Business or the key restaurant reporters like in the WSJ. You'll see weekly stories on more franchisor abuses of power.
But in the heels of the WSJ story, now comes word that as they say over there, "the ketchup has hit the fan" as the relatively new McDonald's leadership continues to take hollow accolades and credit for the success of the Owner Led initiatives during the pandemic, when initially they were far behind all other QSR's until Owners called them out in April.
They are launching a series of new chargebacks to franchisees with very little collaboration or advanced warning. Hasn't the inexperienced restaurant leadership team there realized they couldn't afford to make more enemies, especially in an already tenuous relationship with franchisees, in the middle of finally turning around the hit they all took from poorly implemented business growth plans called BBV2020 three years ago and the pandemic impact? McDonald's alone has more lawsuits against it from investors, unions, and their black franchisees as they run around preaching about social justice and running ads as if they were the epitome of virtue, as their stock price rebounds time after time, no matter what the charges.
Has Wall Street and the analysts become as short-minded and easy to spin as the media now..do the analysts analyze? How is it that McD's can purchase an artificial intelligence company (Dynamic Yield) for $300M with basically two customers, including their small usage, and no one from Wall Street questions the valuation? Then, as you read the Quarterly Earnings transcripts since the purchase, there is not one single, a real data point on its actual results, after promises of significant sales increases. Essentially, all you hear and see from the company is meaningless pablum about how the use of A.I. and Dynamic Yield has helped sales...you won't find any of the restaurant owners who continue to pay unknown, increased tech fees with no justification vouching for the technologies results. Where are you, financial experts? Are you as gullible as all the rest of the world now?
Of course, this doesn't even include all the reports of the salacious behaviors of their last CEO fired by the board after an incomplete investigation, which now has generated perhaps the most ill-advised (ignorant or malfeasant?) corporate lawsuit in business history. Can you imagine the McDonald's Board, with tiny restaurant experienced members, sitting there discussing that the company should sue the already disgraced executive, after hundreds of millions of negative media impressions already created ill-will for the iconic brand? And get this, they had to sue not because they realized they missed looking at company issued electronics, which is routine, but because a whistleblower (former employee that had enough?) had actually to come back and now is suing that same exec for many more violations of the same policies he was fired for as the whistleblower sent pictures and stories that his offenses were not just limited to one or two. Still, it appears that he used the company's female employees, suppliers, etc...as his concubine.
The disgraced former CEO, Stephen Easterbrook from the U.K., has fired back. It looks like they're headed for the Armageddon of all misguided classless lawsuits as Easterbrook doesn't want to give up the $50M+ severance package the esteemed board gave him even after such a blatant violation of corporate policy amid a Me2 world if you need an overall example of how tone-deaf management continues to be as Owner leadership has been guiding the major initiatives.
To those paying attention, the worst is yet to come, as the former CEO has threatened to expose that his behavior was not limited to just him, or fraternizing policies, as some observers believe much worse. Multiple and often repeated rumors both internally and externally say that Easterbrook is so upset with what he believes is a betrayal from his protege that he is ready to take "everyone down with him" as the violations were more widespread amongst his handpicked leadership team and perhaps included other inappropriate breaches of the policy. It is widely rumored that his lack of judgment, widely supported and proliferated by the new "accidental CEO Chris K." of the Founder Ray Kroc's major commitment that the company shall never sell products to the Owners because the Owners would understandably assume they were being gouged, has more fact than fiction to it as the company continues to increase and defer to Owners unexplained, unsubstantiated technology costs that have further stressed a more than frayed relationship.
We've heard from multiple readers in the past 48 hours that McDonald's Corp has just this week played the Grinch that stole business momentum by dropping yet another series of bad decisions on the U.S. Owner Leadership team in what appears to be one more example of making up for the problems in other less prosperous countries, and trying to maintain the process of artificially inflated earnings by announcing yet another round of chargebacks in three major areas including 1) eliminating incentives that helped share the success of Happy Meals that have been in place for over 30 years, 2) by announcing that they are reneging on their commitment to a previously major initiative they agreed to fund to improve employment image issues. They sprung on leadership the other day, that beginning later in the Spring, they will be reducing or perhaps splitting the funding the company agreed to provide for employees who qualified to help them with college tuition (known as Archways), as you may have seen in commercials, and 3) a third decision was announced that sent shock waves through the Owner community already mystified by constantly increasing, non-itemized monthly technology costs, that the company was going to increase their technology fees to cover expenses they incurred in 2017, again from unspecified technology expenses.
Suffice it to say, after the company had wisely deferred to Owner Led initiatives since being taken to task by them for their overall lack of leadership, action, or proper planning at the beginning of the COVID pandemic, they now must have lost any sense of humility as the business has turned around. Chris K. has new-found bravado as he brazenly takes credit for what was the results of a multi-dimensional, seasoned agenda led by Owners, many of who have been in the System longer than he's been alive. His treatment of his partners going back to his days as Easterbrook's handpicked U.S. President is legendary, with quotes that reflect how he is starting to manage again, as clearly the primary decision-maker on these jolting economic cost shifts, as Joe Erlinger, current U.S. President continues to be marginalized by his own mistakes and what many believe is a tenuous relationship with his boss, because of his numerous errors, emotionally unintelligent outbursts during System-wide pandemic calls and a general inexperienced approach to managing the company and the owners/operators.
Many were pleased but cynical when the McDonald's Board, under duress, had to urgently appoint Chris K. as the new CEO, because of Easterbrook's disrespect of the culture and his home office cutbacks eliminating any experienced restaurant bench because it appeared as though Chris K. "started to get it," apologized for his misunderstanding of the importance of Owner relationships in a System proud to call itself "McFamily" in his first video to the System as CEO. It appeared that he had gone to restaurant charm school, changed his overall management demeanor temporarily, and lost some of the Ivy League arrogance that didn't go well when he joined an Operations driven culture known for its informality and rough and tumble transparent meetings with all acting as partners, priding itself on straight talk and common sense.
Owners are meeting as we write to discuss how best to manage these new management and cultural betrayals without "blowing up the relationship" as angry as they are over these short-sighted decisions. Many don't realize that McDonald's' real magic is not the fact that it is a Fortune 50 Corporation with billions in sales, but rather a consortium of small business owners who are the best in the business in terms of restaurant entrepreneurs. These long term Owners built the house that Chris K. and his management team now sit-in in downtown Chicago and the pandemic demonstrates the relevance or lack thereof of senior management as most have not been in the field, traveled, or had their company surrogates in the restaurants during the last eight or nine months, as they continue to collect a significant service fee with little ROI to the Owners. They wouldn't even discuss rebating rent as so many other restaurant companies did during the pandemic, let alone reducing the service fees when they cut most of the field force of support years ago.
The Owners are savvy and love the brand they created, and thus want to keep their quarrels, as the WSJ story talks about internally, but their brand nerves are much more than frayed...they are nearly severed. Many external stakeholders proved during the pandemic that they somewhat get it. Still, suppose corporate management doesn't realize the damage of their actions and lack of trust in their relationships after deceptive and defiant acts. In that case, the courtroom battles with Easterbrook forthcoming may look pale compared to what might transpire in the court of public opinion if the Owners are forced to take more direct actions in other areas."
HEDGEYE
I suspect this is not the last we are going to hear about how difficult things are getting at MCD! I don't want to be long MCD in this environment!
More to come!
