Stop 1: (Define the problem in the case.)

Stop 2: (Identify the OB concepts or theories to use to solve the problem.)

Stop 3: (Explain what you would do to correct the situation.)

Background and Scale

Sixty-nine million. That is the number of customers McDonalds serves per day around the world! The company does a staggering volume of business. But it might surprise you that despite the brands global reach and incredible staying power, it is in the midst of a serious conflict with its other important customersits franchisees. McDonalds has 5,000 franchisees around the world who run 82 percent of the chains 36,000 restaurants, accounting for just under $30 billion or a third of the companys total revenue and employing 90 percent of its employees. This means the average franchisee operates six to seven restaurants, and the company lives or dies by their performance.¹

Trouble under the Golden Arches

The relationship between the company and its franchisees is very complicated and increasingly strained. While franchisees own their respective businesses, McDonalds owns the land and buildings they use. That means the company is the landlord and has ultimate say over whether particular restaurants open or close. The company also largely dictates menu items, required equipment, and most other details, including pricing in many instances. (One franchisee said he controls the price of fewer than 20 of 100 menu items.)²

Franchisees must follow directions from the company and pay an assortment of expenses and fees, such as rent of 15 percent of revenues, a royalty of 5 percent of revenues, and 5 percent of revenues for advertising.³ On top of this, various additions to the menu require new equipment. The McCafe coffee and espresso equipment can cost up to $20,000 per machine, expanding grill space to accommodate all-day breakfast takes another $5,000, and installing a second drive-thru window can cost $100,000.⁴ A milkshake machine costs $20,000, and a new grill $15,000.⁵ While the corporation focuses on the restaurants top line, operators worry about whats left after paying rent, payroll, royalties, and other expenses.⁶

Last but not least, if the movement to boost minimum wages to $15 across the country succeeds, the burden will fall on the franchisees. McDonalds decided to raise wages in all its corporate-owned restaurants to $1 above the minimum wage. The move was presumably intended to help keep up with similar wage hikes by Walmart and Target,⁷ with whom the company often competes for employees. The problem? Corporate stores compete with franchisees too and dont bear the costs outlined above. A wage hike will likely have a much smaller impact on the corporate-owned stores versus the franchisees.

Impact and Potential Causes

The franchise model has worked very well for McDonalds and the majority of its franchisees. Revenues have exceeded expenses and many franchisees have become quite wealthy, which explains why many own multiple restaurants. However, franchisee satisfaction and performance have steadily declined. In 2015, for the first time McDonalds closed more stores than it opened, and the level of same-store sales (a key performance measure) also declined. Franchisees and Wall Street analysts attribute much of the lackluster performance and conflict to poor corporate leadership and policies. Corporate leaders dictate menu items, pricing, and strategy to franchisees. The addition of McWraps, salads, yogurt parfait, and specialty coffees, for instance, were meant to compete with the likes of Chipotle, Burger King, Shake Shack, and Wendys, as well as to keep up with evolving customer tastes.⁸

Boosted sales is certainly a good outcome for the corporate arm of the company, given it takes a cut of all revenues, but franchisees argue that enough money isnt left over for them. Some initiatives, like the dollar menu, are actually money losers for some franchisees, yet it is difficult not to offer them because of national advertising that promotes them, not to mention pressure from regional and corporate representatives. Another franchisee provided an example. One time our coffee price was a nickel over what the advertising price was and the head of the McDonalds region came in and he said: You are over. You cant do this. That was the first time he told us to sell our business.⁹

Beyond the financial implications, many franchisees also feel various initiatives have eroded the McDonalds brand, which makes the promise of serving good-tasting food fast. The company requires that any order be filled in 90 seconds or less, which many franchisees say is unrealistic for many (new) menu items. These standards will be put to the test yet again with the Create Your Taste initiative, which allows customers to personalize their burgers. One longtime but now former franchisee, Al Jarvis, said in an interview that he loves the taste, but the complexities of making it came to epitomize his disillusionment with McDs. The service times went up because of the expansion of the menu I think they went a little overboard. When I would see cars backed up at the drive-thru my stomach would just knot up. The people were different, the company was different. It became very frustrating I wanted to get the hell out. And he did.¹⁰

There is evidence to support Jarviss concerns. The American Customer Care Satisfaction Index Restaurant Report for 2015 ranked McDonalds dead last among all fast-food restaurants. This index measures staff courtesy, speed of checkout or delivery, food quality, and order accuracy.¹¹ The frustration Jarvis expressed is increasingly common and has generated an us vs. them dynamic between franchisees and McDonalds corporate staff.

Franchisees also perceive that McDonalds is using them as a shield, for instance, in deflecting the question of wages by saying it is up to franchisees to do as they see fit. Doing one thing at corporate-owned stores, which account for only 10 percent of employees, and doing something else at franchise stores has the potential of creating more intense conflicts. Steve Easterbrook, relatively new as CEO, is aware of the performance challenges and determined to make significant changes. It will be up to McDonalds employees and franchisees at all locations to effectively implement them