- McDonald’s franchisees are determined to make their voices heard following the promotion of a new CEO, Chris Kempczinski, who has clashed with them in the past as the head of the company’s US business.
- Kempczinski was criticized as pushing expensive initiatives as franchisees struggled with insufficient cash flow.
- According to leaked documents from a group of McDonald’s African-American franchisees, there is a significant gap between black franchisees’ cash flow and the national average, one that has more than doubled in recent years.
- Franchisees have rallied around Kempczinski this week, partly because of improving financials over the past year and partly to protect McDonald’s future.
- Multiple organizations also sent internal memos encouraging franchisees to continue to work together to build “strength in numbers” and demonstrate their power within the McDonald’s system.
- McDonald’s declined to comment on the cash-flow gap and the internal memos shared with Business Insider.
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McDonald’s franchisees are cautiously optimistic about the company’s new CEO, according to multiple interviews and leaked memos viewed by Business Insider. But they’re also determined to make their voices heard following a period of tense relations that resulted in part from his actions as the head of the US business.
On Sunday, McDonald’s announced that CEO Steve Easterbrook had been fired because of his relationship with another employee. Chris Kempczinski, the US business chief who had butted heads with the franchisees, is now the CEO, and Joe Erlinger is the president of McDonald’s US business.
An outsider who joined McDonald’s from Kraft in 2015 and became president of the US business in 2017, Kempczinski struggled to get franchisees on board with bold initiatives like a remodeling program that could cost up to $750,000 per location.
McDonald’s franchisees, who view themselves as a “McFamily” that celebrates people who worked their way up over decades in the business, bristled against Kempczinski’s aggressive plans for modernization. They responded by organizing the company’s first independent franchisee group, the National Owners Association, which is determined to protect franchisees’ interests and grow their cash flow, or the money moving in and out of each franchise in a month.
Ray Kroc 'would roll over in his grave'
Unlike the elected National Franchisee Leadership Alliance - which serves as the official body of elected franchisees at McDonald's - and minority-centric groups like the National Black McDonald's Operators Association, the NOA, formed in 2018, remains an independent organization, unsanctioned by McDonald's corporate office.
The NOA has pushed back on costly investments that cut into cash flow, and franchisees across the US banded together to show their discontent. According to a leaked memo on Monday written by Larry Tripplett, the CEO of the NBMOA and an NOA board member, the majority of operators have now joined the NOA.
A longtime franchisee, who was granted anonymity so they could speak freely without fear of retribution, told Business Insider that "it's sad that you have to do it that way" instead of working hand in hand with the corporate office.
They said that Ray Kroc, the McDonald's founder, "would roll over in his grave if he was here today."
Cash flow has been a major issue for black franchisees in particular. According to NBMOA franchisee documents shared with Business Insider, there is a substantial gap between the average African-American franchisee's cash flow and the overall average cash flow - a gap that has more than doubled in recent years.
In 2012, the average cash flow at African-American franchisees' locations was $319,381, or $24,591 less than the overall average cash flow. In 2017, African-American franchisees' average cash flow was $311,515, or $60,581 less than the average cash flow of all franchisees, NBMOA documents said.
According to a franchisee with knowledge of the situation, the gap between African-American franchisees' cash flow and the average has only grown since 2017. Closing the cash-flow gap is the NBMOA's No. 1 priority, Tripplett said in the memo.
McDonald's declined to comment on the cash-flow gap and the internal memos shared with Business Insider.
McDonald's is determined to get franchisees back on board
Following pressure, McDonald's gave franchisees more time to remodel stores and revamped its delivery plans. Travis Heriaud and Courtney Goodwin, two franchisees who have worked on the NFLA, told Business Insider on Monday that franchisee morale had improved over the past year as financials improved and leadership started to work more closely with franchisees under Kempczinski's lead.
"Average franchisee restaurant cash flow is moving in the right direction, with 11 consecutive months of cash flow growth through September," Easterbrook said in an October call with investors. "We expect this trend to continue through the rest of 2019."
Tripplett said in the memo on Monday that leadership was "cautiously optimistic in some of the results we are beginning to see." He said Kempczinski called him on Sunday evening and "expressed his plans to continue to work on our cash-flow gaps."
Kempczinski continued to build franchisee goodwill on Monday with a video that played at field-office summits - McDonald's regional planning meetings - in Atlanta, Dallas, and Bethesda, Maryland. In the video, Kempczinski told franchisees the company was aiming to grow US comparable sales by 4% next year, which would beat Wall Street's expectations, Bloomberg reported.
On Wednesday, Kempczinski and Chairman Rick Hernandez Jr. held a town-hall-style meeting in Chicago to discuss the future of the company.
"The mission I'm asking you to reenlist in is to make this company an example for the world and to do the right thing each and every day," Kempczinski said.
Erlinger is also mobilizing. The new president of the US business is heading to the field summits this week, then kicking off a tour of the US stores, according to an internal memo.
Franchisees are still determined to make their voices heard
While McDonald's relationship with franchisees - and many of those franchisees' financials - have improved over the past year, franchisee organizations are determined to make sure their voices are heard under the new leadership.
"We believe that owner/operators are the backbone to this system," the NFLA executive team wrote in an internal memo on Monday. "Owner/operators, along with our World Famous Fries, are our brand's true constants. We are the experts, in every community where we operate.
"This year, we have all been reminded of how much our voice matters," the letter continued. "No strategy, no matter how well proven, stands a chance without the belief and commitment of those charged with its implementation."
Tripplett's letter to black franchisees similarly linked their success with their pushback on corporate actions. Tripplett encouraged franchisees to join and renew their memberships to the NOA, a group he said was directly related to much of franchisees' "recent progress."
"The majority of Owners have joined," Tripplett wrote. "We need you to join as there is 'strength in numbers.'"
The NOA posted a letter on its website on Monday that did not directly mention Kempczinski's promotion or the new leadership. Instead, it focused on looking ahead to 2020 and highlighting the company's progress since the NOA's formation.
"The NOA has played a critical role in the positive change we have witnessed this last year," the letter said. "We went from running the play to owning the play. We are back to collaborating with our partners."
Franchisees are rallying around new leadership
With Easterbrook's abrupt departure, franchisee groups seem eager to adjust to the new normal. According to two franchisees, the early response from the summits has been positive, with franchisees expressing optimism about Kempczinski's potential as CEO.
"Yesterday, we did our job: our McDonald's restaurants opened and operated," the NFLA executive team wrote in its internal memo.
The NOA, typically the franchisee organization that is most openly critical of McDonald's leadership, also focused on the positives in its Monday letter.
"We have done great work in the past few years," it said. "Our stores are modernized, our technology is improving, our drive thru's are speeding up, and our marketing is poised for a major break out. And we haven't even mentioned our new food news. The lineup is strong and getting stronger. The future is bright at McDonald's."
The NOA board also said it planned to stop publishing public blog posts.
"This will be our last Sunday fireside chat...for now," it said. "We aren't going anywhere, but it's time for the NOA to focus on our core mission. Our mission of building ownership in our restaurants. Building a culture of operational excellence and world class hospitality."
It is in franchisees' best interest for McDonald's to thrive under its new leadership. Many franchisees have stock in the company; its share price dropped by as much as 3% on Monday on the news that Easterbrook was fired, leading to a $4 billion loss in value. If McDonald's suffers, franchisees' sales may also dip.
"Nobody wants to lose the little piece of the pie they do have," the longtime franchisee said. "So that's the hard part - trying to correct it without cutting your own throat."
Easterbrook is firmly out of McDonald's good graces
Multiple franchisees told Business Insider that they were still in shock over the news of Easterbrook's abrupt firing. Meanwhile, McDonald's leadership and franchisees have described it as fair.
During the town hall, Hernandez alluded to Easterbrook's firing.
Hernandez said he thinks the company's policy "tries to keep the workplace about work, an honest and open interaction with people, and a place where people can believe that decisions are made or not made for personal reasons but for professional reasons, for the best interest of the company."
The NFLA also took a jab at Easterbrook.
"The responsibility of leading this brand is a privilege," it said in its memo. "As we have stated before, a safe and respectful workplace is not a focus, it is a societal expectation, and it is core to our values."
The memo closes: "As our founder Ray Kroc said, 'The quality of a leader is reflected in the standards they set for themselves.' Your owner/operator leadership is committed to setting and living our standards, and we know you are too."
If you're a McDonald's franchisee or employee with a story to share, email [email protected].
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