McDonald’s Warns U.S. Franchisees of Higher Bills Next Year

(Bloomberg) -- McDonald’s Corp. is rolling out a series of financial changes that will result in heftier bills for its U.S. franchisees beginning next year, a move that is stoking tensions with restaurant owners.

According to an internal memo viewed by Bloomberg News, McDonald’s is ending on Jan. 1 an approximately $300-a-month subsidy it pays each restaurant related to Happy Meals. It’s also asking franchisees to jointly fund its tuition program beginning in April, instead of corporate paying for 100%. McDonald’s will also move operators to a “pay as you go” model for technology investment, resulting in a temporary additional expense of $423 per month beginning in March.

“It’s our responsibility, as your franchisor, to ensure we invest our dollars where they will have the greatest impact to the system. To that end, we have made some difficult decisions that will enable us to achieve this objective,” McDonald’s leadership wrote in the Dec. 3 memo to franchisees.

Shares Rise

While the changes will put a dent in franchisees’ profits, they’ll let McDonald’s make investments elsewhere that will benefit restaurant owners, such as in employee development, the company said. The change in technology fees will allow the company to stop carrying about $70 million a year in deferred payments on its own balance sheet, but the other changes won’t affect McDonald’s earnings next year, the company said.

McDonald’s shares rose on the news, climbing as much as 0.9% before paring gains. The company has about 14,000 U.S. restaurants, nearly all of which are owned by franchisees.

The three policy decisions have been in the works for months or even years, and franchisees have long known they were coming, the company said. Some changes were deferred or extended to help franchisees cope with the disruption of the pandemic. Now that the U.S. business has recovered, with 4.6% growth last quarter, the company is ready to usher them through.

Relationship Risk

Still, the changes threaten to disrupt an already tenuous truce between franchisees and management. Some operators weren’t happy when Chris Kempczinski was named chief executive officer about a year ago, given his role in implementing an ambitious and costly modernization plan that spanned menu revamps, store remodels and acquiring artificial-intelligence startups under former CEO Steve Easterbrook.

The relationship between management and franchisees improved during 2020, however, as the pandemic brought temporary rent deferrals, a simplified menu and some other short-term relief. The new slate of changes put trust between management and the operators on shaky ground again, said a person familiar with the thinking of some franchisees, who didn’t want to be quoted discussing the relationship.

The company said the changes are needed to maintain momentum and growth next year. McDonald’s, largely considered a pandemic winner in the challenging restaurant industry due to its strong drive-thru and take-out model, is on track for “a record year,” management said in the memo.

“With only a few weeks until the calendar turns to 2021, our goal as the franchisor is to keep the system operating from an absolute position of strength,” it said. “An important part of that is maximizing our collective investments in the business and putting our resources where they will have the biggest impact and drive growth.”

©2020 Bloomberg L.P.