McD’s Franchisees Unhappy Over Giveaways
Talk to some people and they’ll tell you, “You’ve got to give something to get something.” Others, on the other hand, will remind you, “There’s no such thing as a free lunch.”
Those two approaches boil down the current conflict between McDonald’s and a number of its franchisees.
McDonald’s has sought to drive trial and eventual purchase for new menu items such as its Southern Style chicken sandwiches by offering giveaways. The chain has also pushed its dollar menu and promotional discounts on products at a time when many consumers are feeling pinched and eating out less frequently than in the past.
Franchisees, however, finding themselves dealing with higher operating costs are not all that happy with McDonald’s pushing products that offer low to no margins. Franchise owners are responsible for costs associated with promotional offers.
“There is no question the tension is greater now than it has been in some time,” Ed Bailey, a franchisee who owns 60 McDonald’s restaurants in northern Texas, told Crain’s Chicago Business.
Mr. Bailey, who said he favors sampling programs, estimates that it cost the average McDonald’s about $600 to give away the new chicken sandwiches. He said that while sales for his restaurants were up about seven percent last year, that higher operating costs resulted in “relatively flat” profits.
The average cash flow per McDonald’s was down about seven percent (about $5,000) during the first quarter, according to a company memo obtained by Crain’s.
Discussion Question: Where do you come down in the dispute between McDonald’s and its franchisees over giveaways and discounted product promotions? Do you believe these types of promotions are the proper approach for fast feeders in the current economic climate?
My vote is cast for the parent, McDonald’s. They have a time-test formula, sound or expedient, that they believe they must use it to stay in the growth game and keep the corporation profitable. New products, fees and promotions are all part of that strategy.
Many franchisees have made fortunes with McDonald’s and have been able to enhance their lifestyles. Now that the times are toughening some seem to be saying, “Give us the luxuries of life, McDonald’s, and let us dispense with the necessities.” If only that could be possible.
gjarnoldjr has a great point: promotions should be metrics driven and deliver a measurable ROI. Price promotions are proven, effective tactics, but the results need to be shared with the stakeholders. Promotional tactics that “close the loop” and can measure who the audience was, how they responded to the promotion, how much revenue they brought to the stores, and the lasting effect of the promotion, measured in real impact to the bottom line, will win the day.
To think that time honored traditions will continue to stay true always holding respect and value on their own is, as we see here, a mistake. The idea that free promotions are a necessary marketing effort to maintain and grow a business must be continuously tested for and proven to the franchise customer.
Business history shows many examples of proven strategy poorly planned, implemented and/or executed bringing back failed results. Educating the franchise customer with proven test facts will not only bring most of them around but may also inject some much needed support and enthusiasm to the required effort.
You can’t selectively agree with the franchiser; especially a proven model like McDonald’s. Proactively making franchisees do what is best for them has been proven time and again by this franchiser. $600 seems a pittance compared to the cash flow McDonald’s units generate for their owners.
Giveaways, price promotions and trial offers have always been part of McDonald’s game. It’s more appropriate than ever to use these traffic-drivers, given Americans’ reluctance to open their wallets and to hit the road right now. While McDonald’s is obviously interested in keeping its franchisees happy, the best way to keep their businesses healthy over the short-term is to drive traffic into their locations. Operating profits would become more of a stretch if same-store sales took a dip instead of the 7% comp gains McDonald’s achieved in May.
You have to promote in order to succeed and giving away product samples seems like a no-brainer to me. A sample is one of the least expensive items that any food related company can give and when done properly the most effective. Think of it as a first cousin to stores like Costco doing in-store demonstrations of their products.
Everybody likes to get something for nothing and it will cause many people to stop at a restaurant that otherwise wouldn’t. While they are there chances are very good they will buy something. At the very least they are creating good will that will serve them well in the future.
Given the awful state of American retailing right now, a 7% cash flow decline for the average McDonald’s restaurant just doesn’t seem that bad. McDonald’s, as franchiser, gets its percentages off the top, based on sales not profits. However, McDonald’s also owns and operates many of its restaurants, so severe margin declines would hurt the parent corporation. Furthermore, the dollar menu is a competitive response to Taco Bell, who used it as a key element of its turnaround.
Instead of complaining about the margin losses, franchisees should emphasize the coffee, since it’s the most profitable thing on the menu. And if they’re really unhappy, they’ll find many folks eager to buy them out today. The demand for McDonald’s franchises is many times the supply.
There are two key areas that need to be looked at here. First, franchisers are notorious for doing what is best for themselves rather than what is best for their franchisee. I believe that McDonald’s is no different.
Having said that, while they are obligated to create strong promotions in order to increase chain wide sales, doing it at the financial expense of the franchisee is both selfish and shortsighted.
There is no reason why franchisers cannot compensate their franchisees for expensive promotions either through rebates or reduced fees in order to build a stronger franchise network. After all, a franchiser is nothing without its dealers.
It’s easy to be sympathetic to the franchisees, who want to retain short-term profits. But promotion of new products helps the company drive longer-term brand value and loyalty. It’s important that McDonald’s retains a reputation for adding new menu items and providing great value. I wish them great success!
Giveaways are an important promotion tool for many kinds of products regardless of the relationship between McDonald’s and its franchisees. The tension, however, is a separate issue. McDonald’s has the authority to create the promotions; McDonald’s also can have some influence over operating costs or at least can take that information into account. Unless the relationship is win-win-win-win (headquarters, franchisees, consumers, and shareholders) everyone will lose because the relationship will not work in the long run.
There always have been tensions between McD and its franchisees–when times were good and when times were bad. It’s just the nature of the business.
Corporate is right to use promotions to drive sampling and business. This is a tried and true tactic. If it costs a restaurant $600 to sample a new menu item, that’s pennies compared to the potential benefits, if that item catches on with consumers. This is especially true when dealing with an item that is not traditional for the chain.
Sampling is a proven way to increase sales of a product’s business as well as any ancillary products in the category or even the same aisle. Costco uses this to their advantage and many grocery accounts do the same. The quicker that QSRs like MCD’s realize this benefit, the faster that their franchisees will realize increased sales and profits. This will also provide a better feedback loop as MCD’s tries to introduce new products.