Case Study: McDonalds Franchises

Case Study: McDonalds Franchises

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Case Study: McDonalds Franchises

Introduction to the Problem

Although McDonald’s Corporation (McDonald’s) is a very successful fast-food company with a presence in over a hundred countries outside of the United States, its franchisees and employees experience several challenges from the Franchising business model. The franchisees are expected to maintain low prices and high service and product quality, narrowing their profit margins and often endangering their survival. In addition, franchisees are forced to engage in unfair human resource management practices, such as paying low wages that are marginally above federal and state minimum, or sometimes below these lower limits, to make their businesses viable. In turn, there is much tension between the franchiser and franchisees and between the franchisees and employees, creating a situation likely to degenerate into open conflict. The root of this problem is remised in the franchise agreements, which have clauses that promote engagement in questionable business practices. Franchise agreements have been termed as collusive and restrictive covenants in which the franchiser emerges as the overall winner at the expense of the franchisees and workforce (Krueger & Ashenfelter, 2021).  Besides, such agreements become problematic when they demand a certain standard of products and services without considering the diverse and unique environments in which the franchises operate (Elzeiny & Cliquet, 2013). In the case of McDonald’s, franchises across the world are expected to provide similarly qualify of fast food and eatery services and use prescribed systems, leaving little opportunity for the franchisees to adopt their own business approaches, thus stifling innovation and endangering the survival of businesses. This case is about the challenges that McDonald’s franchisees experience under their restrictive franchise contracts, and the coercive system that McDonald’s has established that erodes the independence and autonomy of the franchises, thus bordering on unfair and unethical business practices.

Background on the Case

This case is about McDonald’s and its franchisees. Although the giant multinational corporation has a global presence, the case is set in the United States. Therefore the case deals with franchises in the country, although the issues are replicated elsewhere globally where the firm has a presence. Thus, this case presents a systemic issue in McDonald’s that has often escaped public scrutiny, yet it is devastating and destroying many businesses in the United States.

McDonald’s is an American fast-food behemoth with humble beginnings and a great business model. It is currently headed by Christopher John Kempczinski as the President and the chief executive officer who took over the reins of the company in 2019 from Steve Easterbrook, having risen through the executive ranks since he joined in 2015. In 2020, McDonald’s operated 39,198 fast-food outlets in 119 countries (McDonald’s Corporation, 2020). The company employs directly about 200,000 employees in its proprietary restaurants, while over two million others work in independent franchises globally. Although the company experienced a 14% reduction in revenues in 2020 due to the coronavirus pandemic, it still managed to earn $8.139 billion and make a profit of $4.731 billion (McDonald’s Corporation, 2020). In this regard, it is one of the American companies with huge financial muscle and enormous influence in the American corporate world.

McDonald’s uses the franchise business model. It combines franchises, which comprise 93%, with proprietary restaurants. Drive-through outlets are iconic in the American market, although other fast-food outlet formats, like sit-in restaurants and takeaways, are also common worldwide. The company’s American and global operations are driven by its mission, vision, and values statements. Its vision it “to feed and foster communities”, while its mission is “to crate delicious feel-good moments for everyone”. In the same vein, the five core values that guide it human capital are serve, inclusion, integrity, community, and family (McDonald’s Corporation, 2020). In this respect, McDonald’s success is largely attributed to Ray Kroc, the founder and an astute businessperson. Notable contributions of Kroc include the deployment of the franchise business model, a standardization system that is propagated through Hamburger University, which trains franchisees, and the introduction of the Big Mac, an iconic hamburger that has become synonymous with the American culture (Britannica, 2021). However, despite its envious success, McDonald’s has been criticized for unethical operations

Problem Description

In this section, the problem presented in the case is defined and contextualized. After defining the problem, the current practices of McDonald’s that precipitate it, s presented in the case, are discussed. After that, the ethical challenges presented by this problem are identified and explained.

The Problem

The problem is in this case described in the article published in The Guardian in April 14, 2015 and authored by Jana Kasperkevic.  The article McDonald’s franchise owners: what they really thing about the fight for $15 was authored on the eve of industrial action by employees working in franchises intended to protest against low wages. Although the article’s heading appears to suggest that low wages were the main issue, it actually focuses on the tribulations experienced by the franchisees in the hands of McDonald’s, the franchiser, which made their businesses hardly profitable enough to pay employees minimum wage. A case is described of a franchisee called Slater-Carter who inherited 2 stores out of three from her father, after he sold one of them upon retirement. However, they had already lost the two stores in quick succession owing to the challenging unrealistic expectations demanded by the franchiser, McDonald’s. Slater-Carter lost their first store after it was closed abruptly when McDonald’s refused to renew the franchisee license. However, their franchisee license was not renewed because McDonald’s did not renew the tenancy lease at the mall where the store was located. The closure of this store, which was located in a local mall, caused 30 employees to lose their job, despite it making $2 million annually in revenues. After that, Slater-Carter and her husband sold off the second store in response to the shocking closure of the first, to avoid losing more money if McDonald’s would decide to revoke the second franchisee license without notice, despite the franchisee license being valid for another year. With the second store closed, 55 employees lost their jobs despite the store earning annual revenue of $3.6 million.

Current Practices Relevant to the Case

The current practices of McDonald’s cause franchisees to experience financial and operational hardships. Firstly, franchisees have to sign franchise contracts that restrict their independence and freedom as entrepreneurs, and set unrealistic objectives. These contracts require that the franchisees maintain some product and service standards. In turn, the franchisees are required to use equipment that McDonald’s must approve of, such as grills and milkshake machines. For instance, a McDonald’s-approved grill costs $15,000 while a milkshake machine costs a further $20,000, prices which are much higher than those of similar equipment in the market. Therefore, the franchisees have no freedom to select equipment they believe would produce the same quality of food. Secondly, the franchisees must charge prices preset by McDonald’s. Therefore, the independent operators are not free to adjust their prices to reflect the realities of their location and business conditions. Thirdly, franchisees are required to use McDonald’s information management systems, which are not supplied for free, because the independent operators have to pay for them. Fourthly, franchisees are required to remodel their stores before their having their franchisee license renewed. Refusal to remodel according to McDonald’s design and standards may cause the franchisee license to be revoked. Sixthly, franchisees pay additional fees for their business operations. These include royalty and advertising fees. Royalty fees are pegged at 5% while advertising charges are 5% of the store revenues. Franchises that refuse to pay these charges are likely to have their franchisee licenses revoked and franchisee contracts terminated. Finally, many franchisees pay rent to McDonald’s because they do not own their business premises. Rent is pegged at 15% of the store’s revenues. Besides, franchisees have to restore the stores after exiting at the end of the franchise agreement. These practices escalate the operation cost of doing business for the franchisees, while denying them the opportunity to adjust these overheads to make their businesses profitable and sustainable, depending on their unique business environments. Notably, the operators of franchises back in the 70s and 80s did not experience these exorbitant business conditions, and therefore, used to make decent profits from the franchises, a performance that has become elusive in the contemporary business environment.

Ethical Issues Related to the Case

The franchisee conditions imposed by McDonald’s present several ethical issues. First, McDonald’s deviates from its core value of serving, in which the company claims it prioritizes its customers and people. It does so by treating franchisees unfairly without affording them the right to due process before not renewing franchisee contracts, which is unethical. While McDonald’s is aware of the worsening economic and business conditions that franchisees operate in currently, it still places stringent business requirements to secure and maintain franchisee contracts. Notably, the cost of production of fast-food and operations has escalated in the recent past and franchisees are to making profits as they use to four and five decades ago. Considering that McDonald’s has not revised its franchisee conditions while proclaiming to be considerate of the people it deals with indicate that the behemoth is selling a false vision that does not reflect the realities of the independent operators.  

Secondly, McDonald’s subtle coercion to enlist compliance to its operational and food standards, which is an unethical business practice, because it does not employ moral management principles. Noncompliance with the undocumented terms, such as using equipment that is not approved by McDonald’s can cause the franchise agreement to be revoked. Indeed, this case demonstrates how Slater-Carter was threatened with closure by McDonald’s corporate and regional representatives of the franchiser for not participating in company-initiated deals and pricing guides. This is unfair. In addition, noncompliance earns the franchiser the label of not being a cooperative team member, thus damaging the reputation and business of the independent operators intentionally, while denying them their right to due process. This violates McDonald’s core values of community and family in which the company claims it promotes good neighbourliness and collective progress.

Thirdly, the company uses underhand tactics and unethical means to keep prices and wages low, which do not reflect moral management principles and discourages moral maximization. McDonald’s dictates the prices charged by franchisees making it difficult for them to adjust their prices to reflect their business realities. Besides, McDonald’s imposes many financial overheads, which along with wage advisories, make it virtually impossible to pay higher salaries. Notably, this is demonstrated in this case when Slater-Carter got a wage advisory from McDonald’s representatives after complaining about how the low prices of the fat-foods she served were endangering her business.

Fourthly, McDonald’s makes unilateral decisions that justify the revocation of franchise agreements,. Notably, McDonald’s can terminate its tenancy agreement with building owners without consulting or informing the franchisees that have rented the premises, thus denying them their right to due process. This causes some franchisees to abandon their franchise agreements before they expire, even when they have already paid the $45,000 franchise fees and rent in advance. It appears that McDonald’s uses unethical means to make money from the franchisees.

Finally, McDonald’s gives contradictory information to the media and public, in a bid to absolve itself from the claims made by franchisees, which violates moral management principles.  Notably, McDonald’s top executives and representatives contradicted every accusation made by Slater-Carter regarding the corporation’s improprieties. These contradictory responses indicated that McDonald’s provided franchisees with the freedom to run their business as they so wished to reflect their operational realities, while in reality, the corporation punished franchisees that deviated from the operational guidelines, which were often developed unilaterally.

Attempted Solutions in the Past

This case notes that franchisees had attempted to remedy their restrictive franchise conditions in the past using legislative approaches. Specifically, Slater-Carter, who has been a franchisee with McDonald’s for close to four decades, had petitioned the California state government to enact a law that expanded the rights of McDonald’s franchisees to prevent wrongful termination of franchise agreements and allow them to recover the financial losses from such unilateral decisions. However, this attempt was unsuccessful because the bill was vetoed by Jerry Brown, the governor of California. Nonetheless, Slater-Carter proposed a revised version of the bill, which was introduced in California’s state legislature.

Stakeholder Identification

Stakeholder	Stakes	P/U/L
Employees	McDonald’s employees are the most valuable resource. They interface the company with the customers at the restaurants and eateries. However, when they lose jobs because of franchise closures, they raise questions regarding the kind of employer McDonald’s is and cast aspersions that could damage McDonald’s reputation. Besides, McDonald’s has invested in their training, which can benefit competitors when employees switch organizations. The solution should ensure that the confidence of McDonald’s as a considerate employer and franchisor is regained.	U
Board of Directors	McDonald’s has a 13-member board of directors that are in charge of its corporate direction through the strategic decisions it takes. The board has a fiduciary responsibility of ensuring that McDonald’s is profitable and delivers a decent return-on-investments to shareholders by making informed decisions as part of its duty to care responsibility. Its decisions can influence how McDonald’s franchise agreements are constructed and enforced. The solution must ensure that the board takes decisions that would reduce the franchisees dissatisfaction and prevent their exiting the franchise agreements.	P
Customers	Customers are the consumers that frequent McDonald’s restaurants and purchase its fast foods. They are the main source of revenue to McDonald’s from their purchases. Therefore, exiting franchisees portent fewer services to fast-food enthusiasts and consumers can reduce McDonald’s revenues by switching to competitors. McDonald’s has to regain consumers confident by treating franchisees fairly and being seen as ethical and considerate employers and franchisers. The solution should ensure it helps regain the consumers’ confidence in McDonald’s	U
Franchisees	Franchisees are McDonald’s business partners because they own most of the restaurants and eateries running using McDonald’s brand. Their exit from the franchise agreement diminishes McDonald’s income and damages its reputation as a credible and reliable franchisor. Poor treatment of franchises by McDonald’s erodes investment confidence from potential franchisees. The proposed solution should win the confidence of existing franchisees by guaranteeing them profitable businesses.	U
Suppliers	Suppliers are other McDonald’s business partners because they supply the raw materials for the fast-food made at the branded restaurants. However, poor contract compliance by McDonald’s alongside unscrupulous business practices that five McDonald’s undue and uncompetitive advantage erodes the confidence and loyalty of suppliers. The proposed solution should help regain the suppliers loyalty and confidence in McDonald’s	L
Shareholders	These are the owners of shares and equity of McDonald’s. They purchase McDonald’s equity with the intention of making returns-on-investment through increased share prices or sale at a later date. The finances accrued from these purchases provide operational and investment capital to McDonald’s. Any threat to the profitability or security of McDonald’s shares may discourage shareholding, plummeting share prices. The solution should ensure that the confidence and loyalty of the shareholders is upheld and retained.	L
Regulatory Authorities	These are the state and federal agencies that regulate the business environment in which McDonald’s operates. They ensure that McDonald’s operates within the law and protect consumers, suppliers and investors from the malpractices of McDonald’s. They will intervene in any disputes or impropriety perpetuated by McDonald’s, which can lead to costly litigations and settlements, and damage McDonald’s reputation. The solution should ensure that McDonald’s corporate practices to not attract the negative attention of these regulators.	P
Real Estate Owners	These are the owners of the premises in which some of McDonald’s restaurant are located. McDonald’s is their tenant when it rents out the spaces, to host the proprietary restaurants or be sublet to the franchisees. The solution must ensure that real estate owners maintain their confidence in McDonald’s as a tenant.	L
Media	Media are the disseminators of news and information related to McDonald’s to the public. Their power emanates from influencing public opinions about McDonald’s malpractices and maltreatment of franchisees, thus can damage McDonald’s reputation. Their inclusion in the solution is critical because it will help repair any maligned reputation of McDonald’s.	P
Competitors	McDonald’s has several competitors in the fast-food industry that use the franchising business model to run their enterprises. Due to the fierce competitiveness in the marketplace and industry, these competitors compete for labor and market share. McDonald’s employees and franchisees can easily switch to competitors, eroding the company’s bottomline. Therefore, the solutions should prevent McDonald’s franchisees and employees from being poached by competitors.	U

Possible Solutions

After analyzing the case, I propose to resolve the challenges being experienced by McDonald’s franchisees to ensure that their businesses are profitable again and that McDonald’s franchise agreement conditions are not driving the independent operators out of business. In addition, these solutions are expected to resolve the ethical dilemmas presented by the franchisee’s complaints and to promote ethical corporate culture at McDonald’s.

Revision of the Conditions in Franchise Contracts

I will propose the revision of franchise agreement, in consultation with the Board of Directors, to allow for more autonomy to independent operators. I feel like the complaints of by Slater-Carter are a reflection of the issues concerning other longstanding franchisees. In relaxing the restrictive agreement conditions, I propose to allow independent operators more leeway in stocking their own products away from McDonald’s prescribed ones, provided they meet our standards of food quality and safety. I will also propose that the decisions affecting franchisees incorporate the longstanding independent operators, equipment suppliers that have been loyal to McDonald’s for an extended period, and employee representatives, because I feel that their engagement would improve the quality of the decisions. This approach echoes the views of Barros & Taylor (2020) who argue that consultative decision–making involving neoliberal business strategies yielded solution that were intellectually and morally acceptable to the stakeholders. In this regard, such consultation before developing and signing franchise contracts would help determine whether the objectives of the agreement are achievable in the unique business situations and environments of the franchisees. I feel that this would promote ethical decision-making, corporate transparency and setting of realistic objectives that can be met by franchisees without eroding their profits or forcing them to exit the franchise contracts, or undermining the Board of Directors’ oversight mandate. Besides, this approach would deliver a win-win relationship between the franchisor and franchisees because it promotes the fair treatment of struggling franchisees (Carroll, Brown, & Buchholtz, 2017). I believe that many franchisees would not opt to exit the franchise agreements if their business were lucrative.

Implementation of a coherent public communication strategy

I will propose the formulation of a coherent public communication strategy that would require McDonald’s officials and representative to provide the public with regular and accurate information related to the franchise conditions and disputes. This would prevent issues being exposed in media to reach McDonald’s executives, while providing an early opportunity for the due process of determining the cause of the franchisee’s dissatisfaction. Open communication is a critical component of moral management because it promotes the right to due process and fair treatment of the disputants (Carroll, Brown, & Buchholtz, 2017). In addition, the communications strategy should have a whistleblowing mechanism that would allow franchisees to raise concerns about their treatment by McDonald’s representatives and officials. I feel that this solution would promote corporate transparency and effective communication with franchisees and the public through positive media messaging. In addition, the positive messaging to the public would endear out customers, prospective franchisees and suppliers, bolstering their loyalty. In this regard, Sierra, et al. (2017) argued that customers viewed ethicality s critical for positive brand equity. Therefore, this solution would promote our brand equity in the long-term      

Employment of Moral Management Approaches to Franchisee Concerns and Disputes

I propose to change the operational culture of McDonald’s to entrench a moral management approach, which would promote moral maximization that conforms to our ethical core values of service, integrity, family, and people. Some of the complaints from Slater-Carter implied that McDonald’s representatives and officials harassed and intimidated franchisees that did not adhere to McDonald’s operational guidelines, such as pricing and wages. This implies that McDonald’s manage management and leadership does the human freedoms and equity of the franchisees because it does not provide sufficient liberties for the franchisees to meet their own business goals the way they find fit (DeTienne, et al., 2021). In this case, I would promote servant leadership because it is critical in resolving conflicts humanely (Jit, Sharma, & Kawatra, 2016). One way of improving ethical and humane conduct at McDonald’s is to revamp our ethics training and hold regular ethics audits to help inculcate an ethical culture and promote moral development.

Conclusion

Although McDonald’s relies heavily on the franchise business model for its huge and ongoing success, considering that franchisees comprise over about 90% of McDonald’s branded restaurants, the few remaining ones being owned directly by McDonald’s, it treats the franchisees harshly. McDonald’s makes it difficult for franchisees to operate profitably in the contemporary business environment due to its restrictive franchise agreements and unilateral decision-making related to the franchise contracts and dispute resolution. These challenges are worse when they involve one or few franchisees or are isolated incidences, which can be ignored or resolved quietly through coercive means. Although this case was about the tribulations of Slater-Carter, a franchisee with McDonald’s for close to four decades, it demonstrates the possible challenges experienced by other franchisees across the world that have not garners courage to expose McDonald’s corporate malpractices and unethical behavior.

References

Barros, A., & Taylor, S. (2020). Think tanks, business and civil society: The ethics of promoting pro-corporate ideologies. Journal of Business Ethics, 162(3), 505-517.

Britannica (2021). McDonald’s: American corporation. Retrieved from https://www.britannica.com/topic/McDonalds

Carroll, A. B., Brown, J., & Buchholtz, A. K. (2017). Business & society: Ethics, sustainability & stakeholder management. Cengage Learning.

DeTienne, K. B., Ellertson, C. F., Ingerson, M. C., & Dudley, W. R. (2021). Moral development in business ethics: An examination and critique. Journal of Business Ethics, 170(3), 429-448.

Elzeiny, H., & Cliquet, G. (2013). Can service quality be standardized in a franchise network? The case of McDonald’s in Egypt. In Network Governance (pp. 255-268). Physica, Berlin, Heidelberg.

Jit, R., Sharma, C. S., & Kawatra, M. (2016). Servant leadership and conflict resolution: A qualitative study. International Journal of Conflict Management, 27(4), 591-612.

Kasperkevic, J. (2015). McDonald’s franchise owners: What they really think about the fight for $15. Retrieved from https://www.theguardian.com/business/2015/apr/14/mcdonalds-franchise-owners-minimum-wage-restaurants.

Krueger, A. B., & Ashenfelter, O. (2021). Theory and evidence on employer collusion in the franchise sector. Journal of Human Resources, 1019-10483.

McDonald’s Corporation (2020). Annual report 2020. Retrieved from https://www.annualreports.com/HostedData/AnnualReports/PDF/NYSE_MCD_2020.pdf.

Sierra, V., Iglesias, O., Markovic, S., & Singh, J. J. (2017). Does ethical image build equity in corporate services brands? The influence of customer perceived ethicality on affect, perceived quality, and equity. Journal of Business Ethics, 144(3), 661-676.