The key to McDonald's turnaround plan: franchisees.
On Monday, McDonald's revealed its plan to fix the company's struggling sales. One major piece of the puzzle is refranchising to increase the company's percentage of franchised restaurants. While 81 percent of McDonald's locations worldwide are currently owned and operated by franchisees, the company wants to increase that percentage to about 90 percent by the end of 2018.
To achieve the higher mix of franchised restaurants, the company will refranchise 3,500 locations over the next three years. McDonald's says it will take a market-by-market approach to refranchising to find the "optimal mix" in each market. While some markets will soon have a 100 percent franchised structure, with all locations owned and operated by franchisees, larger markets such as the U.S. will continue to mix corporate and franchised locations.
"The power of franchising… is incredibly liberating for us as a McDonald's system," McDonald's CEO Steve Easterbrook said in an investor call about the turnaround plan on Monday. "I have a strong philosophical commitment behind franchising. I think it's incredibly important to our business."
The refranchising efforts will help the company deliver approximately $300 million in general and administrative savings. Additionally, McDonald's reiterated an estimated $2 billion in capital expenditures in 2015, the lowest in more than five years for the company. Franchised locations take less corporate investment and staffing than corporate locations, often saving the company money, while also forcing corporate to surrender a larger degree of control.
The company also emphasized the importance of local franchisee in determining distinctive needs in specific markets, and driving energy and accountability.
McDonald's new refranchising efforts are a continuation of a previous initiative, announced in May 2014, to sell at least 1,500 company-owned restaurants to franchisees by the end of 2016. As this prior refranchising effort provided a jumping off point for the current 3,500-location plan, don't be surprised if figures change as 2018 approaches.
"2018 is not an end state," Easterbrook said in response to a question regarding the company's decision to aim for 90 percent franchised locations. "There's a pace and a quality. 2018 is not when the world ends."
Refranchising is a clear-cut step for franchises – especially large franchises – to take when they need to boost net income. In early 2014, Burger King finished a refranchising effort that resulted in a 99 percent increase in net income over the previous year and close to 100 percent of restaurants owned by franchisees. One year later, the chain doesn't have more locations to sell but is doing well, with same-store sales rising 4.6 percent in the first quarter of 2015.
Restaurant chains such as Wendy's and Jamba Juice have also increased the proportion of franchised locations to cut costs and bring in more cash. Meanwhile, other chains have gone the opposite direction, with investor favorites like Starbucks and Chipotle refusing to adopt the traditional franchise model.
While Easterbrook highlight McDonald's "rich history of standing shoulder-to-shoulder with our franchisees when it comes to decision making," franchisees' relationship with the company have not always been smooth sailing. In April, franchisees rated their relationship with the company 1.81 out of 5 in a survey of 25 franchise owners by analyst Mark Kalinowski of Janney Capital Markets, the lowest figure ever reported in the survey's 11-year history.
To further complicate McDonald's franchisee relations, the National Labor Relations Board is holding the company responsible for a number of labor violations as a joint employer, something the company says violates the franchise model. Refranchising may be a good way for McDonald's to bring more money into the system, but execution will be far from seamless for the still struggling company.
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