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- McDonald’s ex-CEO Steve Easterbrook was determined to modernize the chain, until he was abruptly terminated in early November.
- The relationship between McDonald’s — lead by Easterbrook and Chris Kempczinski (the head of company’s US business who replaced Easterbrook as CEO) — and franchisees was sometimes tense, in part because of the cost of these initiatives.
- McDonald’s franchisee count dropped from slightly less than 2,100 to roughly 1,700 during Steve Easterbrook’s time as CEO, according to leaked internal franchisee documents obtained by Business Insider.
- The number of black franchisees went from 261 to less than 200, according to franchisees.
- The gap in cash flow between black franchisees and McDonald’s average across all franchisees grew significantly while Easterbrook was CEO, with the disparity growing to roughly $68,000 per month, according to one current and one former franchisee.
- “The current state of affairs for African American Owners can only be described as hostile,” the head of McDonald’s black franchisee group wrote in a leaked letter in March. “We are very concerned that we see no one that looks like us in Senior Management at McDonald’s.”
- McDonald’s said in a statement to Business Insider that it “is among our top priorities that all McDonald’s franchises in all communities have the opportunity to prosper, grow and achieve their business ambitions.”
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Former McDonald’s CEO Steve Easterbrook repeatedly said his goal was to build a “modern, progressive burger company.”
But, internal documents from McDonald’s franchise groups show that this modernized version of the chain meant fewer franchisees — including fewer black franchisees.
And, black McDonald’s franchisees say that disparities between themselves and their white counterparts grew significantly during Easterbrook’s time as McDonald’s CEO from 2015 to this November.
At the end of 2014, there were 2,099 total McDonald’s franchisees in the US, according to internal documents from the National Black McDonald’s Owners Association (NBMOA) obtained by Business Insider. Today, there are roughly 1,700, according to internal documents from the National Owners Association (NOA), an independent franchisee group that has pushed back against many of the initiatives rolled out under Easterbrook’s leadership.
Black franchisee count declined significantly. At the end of 2014, there were 261 black McDonald’s franchisees, according to NBMOA documents. Today, two franchisees say, there are less than 200.
Business Insider spoke with five current and former black franchisees in recent weeks about disparities at McDonald’s. Alongside interviews with current and former corporate employees and leaked internal documents from the NBMOA, NOA, and McDonald’s corporate, these conversations reveal a company where certain franchisees are struggling to keep up as the fast-food giant evolves.
According to franchisees, those that own fewer stores — including many black franchisees — have been left behind as McDonald’s modernizes.
At the end of 2017, black franchisees owned 6.2 locations on average, compared to the overall franchisee average of seven locations even, according to NBMOA documents obtained by Business Insider.
That average store count increased for both groups since the end of 2012, when the average black franchisee owned 5.1 locations. The average store count for all McDonald’s franchisees was 5.3 locations at the time.
As of 2019, over 48% of franchisees own between 1 and 5 restaurants, according to McDonald’s. With 95% of locations run by franchisees, McDonald’s says that the company has an economic incentive for all restaurants to succeed.
McDonald’s said in a statement to Business Insider that it “is among our top priorities that all McDonald’s franchises in all communities have the opportunity to prosper, grow and achieve their business ambitions.”
“These efforts are rooted in our core belief that diversity and a vibrant, inclusive and respectful McDonald’s makes us stronger,” the statement continued. “McDonald’s is proud to create opportunities for entrepreneurship, economic growth and mobility in communities across the country.”
Some franchisees struggled as McDonald’s modernized
McDonald’s and other fast-food franchises have moved towards a model with fewer franchisees who own more locations in recent years, according to industry expert John Hamburger. Hamburger says that new tech has made it easier to operate more locations, while costs such as wages and healthcare make running a restaurant more expensive.
“Over the last five years, you’ve had a real uptick in labor costs and franchisees don’t make as much money as they used to. … With technology helping it out, you have got to run more stores. So it’s causing this consolidation,” Hamburger said.
On top of rising wages, McDonald’s franchisees faced another massive cost — the price of Easterbrook’s modernization plan. In 2017, Easterbrook unveiled the tech-centric “Experience of the Future” growth plan. The plan included an emphasis on mobile ordering, installing kiosks into locations, and remodeling restaurants. These remodels could cost up to $750,000 a location, a cost that many franchisees with fewer stores and lower cash flows could not afford, even with McDonald’s covering 55% of costs.
Multiple black franchisees told Business Insider that they struggled to match rising costs and investments with higher sales.
Juneth Daniel, a black former franchisee who sold her McDonald’s locations in 2018, said that the remodels helped convince her she needed to get out. Previously, Daniel had worked at the fast-food giant for two decades, including a decade as a franchisee.
“I’m one of those people you would say have ketchup in your veins,” she said.
However, when she learned how much remodels would cost, Daniel said she and other operators quickly began thinking about selling locations. Daniel did not believe that certain expenses, such as remodeled tile floors, would help increase her sales or win over customers. Further, Daniel said, she felt pressured by consultants who said her store was not measuring up in restaurant visits.
It was a harsh exit from a company Daniel said once felt like a family. She and other franchisees said they felt Easterbrook, his leadership team, and the McDonald’s board were increasingly focused on shareholder returns, not what could best serve franchisees.
“He just put a bad taste in everybody’s mouth,” Daniel said of Easterbrook. “He kept talking about the shareholders. It was never about the operators.”
Black franchisees’ locations have lower average cash flows — or the cash earned minus the money spent by a business — than McDonald’s overall average cash flow, according to multiple franchisees and NBMOA documents. As a result, it is more difficult for these franchisees to have the necessary funds to complete remodels and other updates.
Franchisees told Business Insider that a number of factors contribute to this issue, including being more likely to operate in regions where they pay more for services such as security and insurance, despite having lower sales. Further, some franchisees said they were excluded from what they call McDonald’s “old boys network,” blocking them from buying locations in areas with higher average cash flows.
This gap grew while Easterbrook was McDonald’s top executive. In 2012, black franchisees cash flow was roughly $24,600 less than the overall average cash flow. In 2017, black franchisees’ average cash flow was roughly $60,600 less than the average cash flow of all franchisees, according to NBMOA documents.
“The cash-flow numbers don’t lie,” said Ken Manning, a black former McDonald’s franchisee and one of two people who said the cash-flow gap has now grown to about $68,000.
Black franchisees are also more likely to have fewer locations than white counterparts, franchisees say.
“The reality is that most of the people who are able to leverage two stores into 12 or to 20 stores — most of them are white,” said Georgetown professor Marcia Chatelain, who wrote the upcoming book “Franchise: The Golden Arches in Black America.”
Tensions were high between McDonald’s and franchisees during Easterbrook’s time as CEO
Daniel and Manning said that, under Easterbrook, it felt clear to franchisees that McDonald’s leadership team’s first focus is shareholders. Manning said that, while he and other franchisees understood that was the role of corporate executives, it felt like a departure from McDonald’s founder Ray Kroc’s emphasis on franchisees’ financial performance.
McDonald’s franchisees pushed back against many of the initiatives rolled out under the leadership of Easterbrook and Chris Kempczinski, who became head of the chains US business in 2016 and replaced Easterbrook as CEO in early November.
In 2018, a group of franchisees formed the NOA, the chain’s first independent franchisee organization. Since the group’s formation, franchisees say, McDonald’s has collaborated with franchisees and made adjustments to controversial plans, including allowing more time to complete remodels and tweaking the delivery program.
“The NOA has played a critical role in the positive change we have witnessed this last year,” the NOA board wrote in a letter sent the day after Easterbrook’s termination was announced. “We went from running the play to owning the play. We are back to collaborating with our partners.”
A longtime black franchisee, who was granted anonymity so he could speak freely without fear of retribution, described the need for a new, independent franchise organization as “sad,” signaling a departure of a history in which franchisees and the corporate office worked hand-in-hand. He said that Ray Kroc “would roll over in his grave if he was here today.”
The NBMOA, which represents McDonald’s black franchisees, also pushed back against issues during Easterbrook’s time as CEO.
“In general the trajectory of the treatment of African American Owners is moving backwards,” NBMOA CEO Larry Tripplett said in a letter to McDonald’s east and west zone presidents in March obtained by Business Insider. “Through no fault of our own we lag behind the general market in all measures.”
In a statement to Business Insider, Tripplett said the NBMOA was encouraged by the process seen at McDonald’s. The organization declined to comment on specific documents shared in the article, which were not provided to Business Insider by the NBMOA itself.
“The National Black McDonald’s Operators Association (NBMOA) is the largest African American organization of established entrepreneurs in the country,” Tripplett said in a statement. “Our goal is to ensure that McDonald’s Corporation (McDonald’s) is fully and authentically engaged in the African American experience — including African American communities, employees, vendors and franchisees.”
“Working in collaboration with McDonald’s, we both are committed to delivering world-class hospitality, operational excellence, and increasing guest visits,” the statement read. “We are working together to make the McDonald’s brand shine by fully integrating African Americans at all levels. We both recognize that when we move together; we move further. And we are encouraged by our progress.”
Losing black leadership from the top
In the March letter from Tripplett, the NBMOA leader also expressed concern regarding the lack of black executives at the company. Tripplett emphasized the need for “urgent progress” on the issue in his letter in March.
“The current state of affairs for African American Owners can only be described as hostile,” Tripplett wrote. “We are very concerned that we see no one that looks like us in Senior Management at McDonald’s.”
Easterbrook replaced Don Thompson, McDonald’s first black CEO. According to one former high-ranking corporate employee who left within the last two years, support for black executives appeared to decline with Thompson’s departure.
Along with modernizing through tech, Easterbrook had worked to revamp its corporate structure around the world and the US. Easterbrook said that removing levels in the chain of management speed up the transfer of knowledge and helped McDonald’s roll out new innovations more quickly.
In the US, McDonald’s lost a significant amount of black leadership and regional leadership more generally with the restructuring of its field organization in 2018. McDonald’s consolidated its field operations to 10 regions from 22. The company spent roughly $80 million to $90 million on the cost-cutting reorganization, primarily on severance and shutting down field offices.
Two long-time franchisees said that there were nearly 50 African Americans in leadership positions director level and above — including in regional field offices — when Easterbrook started in 2015. They say that number, in part due to corporate reorganization, fell to the single digits by the time Easterbrook left the company.
According to McDonald’s, the decline in black leadership has been broadly proportional during the reorganization. Currently, McDonald’s says, 45% of its US corporate officers are people of color and 80% of US field vice presidents today are people of color.
Where does McDonald’s go from here?
Kempczinski has said he will generally continue Easterbrook’s strategy, which emphasizes technology and modernization.
However, franchisees are eager to make their concerns heard. At least some franchisees are hopeful that Joe Erlinger, who was promoted to the head of the US business, will better represent franchisees’ interests. Erlinger is seen as someone who will once again emphasize the “three-legged stool,” or equally balancing the needs of McDonald’s franchisees, suppliers, and employees.
“We are encouraged by the decision to bring Joe Erlinger into the U.S. President position as he is known as a ‘system’ leader with a deep understanding of the importance of the three-legged stool and mutual collaboration from his tutelage working for Charlie Bell,” the NOA wrote in an internal memo viewed by Business Insider.
The memo continued: “Joe is getting great reviews for his summit presentations, especially knowing he couldn’t have been prepared for such developments thus making his comments and approach even more impressive.”
The NOA looks likely to team up with the NBMOA to address black franchisees’ concerns. Tripplett, who was elected to the NOA’s board, recently encouraged black franchisees to join the NOA.
“Much of the recent progress made for McDonald’s Franchisees can be directly related to this independent trade association,” Tripplett wrote in a letter to NBMOA members the day after Kempczinski’s promotion. “If you have not done so please join now.”
Kempczinski has been working to improve his reputation among franchisees more generally, even before his promotion to CEO. Over the past year, McDonald’s has granted extensions on how soon franchisees need to remodel stores and switched up its delivery model after complaints. Franchisee cash flow has been improving over the past year, something that a source familiar with the matter said would continue to be a focus.
McDonald’s declined to share specific plans to improve black franchisees’ financials and address NBMOA concerns. However, a source familiar with the matter said that the company is committed to attracting more operators from diverse backgrounds and fostering a diverse corporate team under Kempczinski’s leadership, citing internal conversations in recent weeks.
On November 21, McDonald’s internally announced the company was adding a third operations officer in field offices in Chicago, Dallas, and Nashville, according to internal documents viewed by Business Insider. All three of the new operations officers are people of color, and two are black.
On Monday, McDonald’s announced that Women’s National Basketball Association commissioner Cathy Engelbert had been elected to the company’s board. In a statement, McDonald’s Chairman Enrique Hernandez Jr. said that Engelbert’s election “underscores our commitment to diversity at all levels, from the crew room to the board room.”
If you’re a McDonald’s employee or franchisee with a story to share, reach out at firstname.lastname@example.org or on the Signal app at +1 646-768-4740. I’m also available via Twitter DM at @Kate_H_Taylor or on the phone at 646-768-4740 — no PR pitches, please.
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