McDonald’s aggressive plan to redesign and update stores to meet the growing consumer appetite for delivery and self service collided with some major opposition this week from franchisees. “To put it bluntly, stop everything that is not currently in the works,” said an email that went out to members of the chain’s National Owners Association.
The email was in response to the pressure franchisees have lately felt under McDonald’s “modernization” plan. A recent survey, highlighted this week, notes that franchisee operators are feeling “cash-strapped” in part because of the requirements for remodeling stores to fit McDonald’s “Experience of the Future” model, which most locations are expected to complete by 2020. (More on that in a minute.) According to the survey, conducted by analyst Mark Kalinowski, almost nine in 10 franchisees said they were “unsatisfied with their cash flow” and that McDonald’s is launching too many expensive initiatives that don’t pay off. Remodeling stores to fit McDonald’s new tech-driven features is one of those initiatives, because the costs of revamping a store may not necessarily be recapped in a timely manner.
Remodeling is a light way of putting it. Last August, the former Rock N Roll McDonald’s in Chicago reopened as a flagship “Experience of the Future” restaurant. The steel-and-glass revamp included self-order kiosks, dedicated curbside pickup areas for mobile orders, and more space to accommodate drivers fulfilling mobile orders via Uber Eats, with whom McDonald’s has an exclusive partnership. The new store was part of McDonald’s $6 billion effort to “modernize” the majority of McDonald’s restaurants by 2020.
Sounds easy when it’s stated on a press release: just throw some kiosks by the digital menus and re-allocate some parking spaces for delivery drivers, right?
Well, no. A report yesterday noted that “some remodels of aging buildings are so extensive, they require franchisees to raze restaurants and rebuild from scratch.” Remodels are costing anywhere from $160,000 to $750,000, according to the report. And some restaurants have to close during the process, which is obviously a blow to revenues. Additionally, there are concerns that the return on investment won’t be enough for some stores once remodels are finished.
These concerns have been ongoing for a little while now. Back in November, McDonald’s pushed the 2020 deadline back to 2022, but with caveats. For stores completed by 2020, McDonald’s will pay 55 percent of the remodel costs; those who opt for a 2021 or 2022 completion date only get 40 percent of their costs covered.
And before that, in October, a group of 400 U.S.-based McDonald’s franchisees formed the aforementioned National Owners Association, a self-funded owner advocacy group. While the group initially addressed the challenges operators face around controlling menu pricing, the “modernization” challenges have since been added to the list of issues, made clear in a memo released in mid-December.
The more recent memo, which told franchisees to halt work on modernization efforts, also told franchisees, “We canNOT afford the waste that a ‘one size fits all’ reinvestment program creates.”
It’s a point the larger fast-food industry should note as chains continue to alter their operations and their stores to accommodate demand for delivery, self service, speed, and other facets of a digitally driven world. Over 90 percent of McDonald’s restaurants in the U.S. are owned and operated by franchisees, but they serve vastly different demographic groups. Customer needs and wants will inevitably vary between, say, suburban Minneapolis and San Francisco’s city center, or Denton, TX and Amherst, MA. Which is to say, a one-size-fits-all modernization plan and all its associated costs can’t possibly cater to every type of customer. On the other hand, anyone with a working brain understands how great the demand is for services like Uber Eats and the ability to skip the line via kiosk ordering.
Lots of fast-casual and quick-service chains are redesigning the way they do business; often, like McDonald’s, literally. Notably, Wendy’s also has a new design underway that requires remodeling of franchise locations. Unlike McDonald’s, though, there so far doesn’t seem to be too much uncertainty about ROI; franchisees report great returns. But Wendy’s has a strategy that involves fewer locations and concepts that don’t necessarily require rebuilding the physical location.
For McDonald’s, the current drama is far from over. However, it definitely highlights the precarious role of the franchisee when it comes to digitizing operations at a major restaurant chain. McDonald’s current battle with franchisees will, for better or worse, influence the way other major fast-food retailers approach their own redesign plans in future.