McRevolt: The Frustrating Life of the McDonald’s Franchisee
Al Jarvis was 16 when he started working at a McDonald’s in Saginaw, a city in Michigan, in 1965. His first customer ordered an All-American: a burger, fries, and shake for 52¢. Soon Jarvis was working 50 hours a week and catching up on sleep at school. He skipped college to manage restaurants. By 1977 he was advising McDonald’s franchisees and helping with store openings across the state. One day in 1980, as he was unpacking his garment bag, his young son asked, “Daddy, where do you live?” So the next year he bought a McDonald’s in Hastings, southeast of Grand Rapids. Over the years he hired hundreds of employees, saw dozens of menu items come and go, and spent four or five hours a day, five or six days a week, watching over the counter and grills from his vantage at the fry station.
Jarvis looked forward to celebrating 50 years with McDonald’s this past May. And then, six months short of that milestone, he sold his restaurants. “I wanted to get the hell out,” he says one recent morning as he sits in the Hastings McDonald’s, sipping a skinny vanilla McCafé Latte. Such “foo-foo coffee,” as he calls espresso and its variants, is partly why he bailed: He loves the taste, but the complexities of making it came to epitomize his disillusionment with McD’s. “The service times went up because of the expansion of the menu,” he says. “I think they went a little overboard. It was difficult in the kitchen. When I would come down Apple Street behind the restaurant and 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.”
There are 5,000 McDonald’s franchisees around the world. They run 82 percent of the chain’s 36,000-plus restaurants and generate a third of its $27.4 billion in annual revenue. The average franchisee has six outlets; Jarvis had two, including one he built in Gun Lake, near Hastings. A lanky 67-year-old known around Hastings as Big Al, he likes to say he has ketchup in his blood. His watch is embossed with the Golden Arches logo. “McDonald’s was awful good to me,” he says. “I believe in the brand.” But like many of his fellow operators, he wonders whether executives at headquarters will figure out how to innovate while staying true to the chain’s promise of serving good-tasting food fast. Jarvis’s experience suggests the answer is no, and unlike current franchisees, who are reluctant to speak on the record because they don’t want to provoke HQ, Jarvis is free to say what others can’t or won’t.
“I don’t think they know what they want to do,” he says of McDonald’s top executives. “They’re saying, ‘Let’s go back to basics,’ then they’re doing these customized burgers, and they’re talking about all-day breakfast.” He shakes his head. “I feel sorry for the managers and the crew. That’s not our niche. We make burgers and fries.”
For the first time in at least three decades, McDonald’s this year will close more restaurants in the U.S. than it opens, for a net loss of 59 locations. Same-store sales in the U.S., where McDonald’s gets 30 percent of its revenue, have declined in eight of the past 10 quarters. It’s a number that Wall Street watches closely. The company’s shares have underperformed the Standard & Poor’s 500-stock index for the last three calendar years.
McDonald’s has gussied up its restaurants, stuffed tortillas with baby kale, and promised to rid its chicken of antibiotics, all to little avail. This year it promoted a sirloin burger in ads bringing back the Hamburglar character as a hipster with chin stubble and a Zorro mask; the company recently said the sandwich didn’t meet sales expectations. The sirloin burger was only the latest would-be hit that flopped.
At the same time, a glut of new menu items has slowed service to the point that McDonald’s drive-thru waits in 2013 grew to their longest since at least 1998, according to QSR, a restaurant industry magazine. Slowness at McDonald’s is, of course, sacrilege. If nothing else, the chain has always been known for speed. Ever since the days of owner Ray Kroc, it’s been a growing network of continuously improved assembly lines delivering the exact same food in the exact same form as quickly as possible.
And it’s not like people are tired of burgers. Smashburger, In-N-Out Burger, BurgerFi, and Five Guys Burgers & Fries are all expanding. So is Shake Shack, which has grown from a cart in a Manhattan park in 2001 to 71 locations (each estimated to ring up, on average, about twice the sales of a McDonald’s store in the U.S.) and which saw a January 2015 initial public offering. In Chicago, customers wait in line for three hours for the cheeseburgers at haute diner Au Cheval.
McDonald’s is also trying to compete with Starbucks, Chick-fil-A, and Jamba Juice. Rare is the food trend that the company won’t try to prefix with Mc. “They’re doing too much,” says Bob Goldin, executive vice president at researcher Technomic. “And they don’t seem to be the best at anything anymore.” Franchisees polled recently by industry analyst Mark Kalinowski registered their gloomiest six-month outlook in the survey’s 12-year history.
This summer, McDonald’s raised hourly worker wages at company-owned stores to at least $1 above the local minimum. That may be a good or bad move, depending on one’s views of the free market. Either way, it put pressure on independent operators to follow suit, which hardly renewed their affection for the suits at headquarters. Steve Easterbrook, the 48-year-old Brit who became chief executive officer in March, has named an executive to strengthen ties with franchisees. In an e-mail, McDonald’s spokeswoman Becca Hary said, “We have a strong working relationship with our independent franchisees, and together we are standing strong and working to turn around McDonald’s business.”
In early September, McDonald’s announced it would start offering all-day breakfast across the U.S. Customers will soon be able to order a limited selection of breakfast items past the usual 10:30 a.m. cutoff. That will require changes in the restaurants, such as finding room on the grills for eggs and in the fryer baskets for hash browns when most customers are ordering burgers and fries. Those changes cost money—including a potential $500 to $5,000 for equipment—that will fall mostly on franchisees. Customers will be displeased to learn that some of their favorite items, such as Egg McMuffins, won’t be available after 10:30 everywhere. It all depends on a particular outlet’s capacity, staffing, and configuration of kitchen equipment. Serving food at McDonald’s scale is an intricate ballet, and adding complexity can lead to longer lines. “I’m not going to miss that at all,” Jarvis says.
The franchise Jarvis bought in 1981 sits on State Highway M-43 just west of downtown Hastings. Lined up on either side of the road are Burger King, Wendy’s, Pizza Hut, KFC, Subway, Biggby Coffee, and a handful of other chains. There’s an auto parts store where Jarvis’s main rival three decades ago, Burger Chef, once stood.
He won’t say what he paid for his store, but he had to take a Small Business Administration loan at the Jimmy Carter-era interest rate of 16 percent. And the store was a fixer-upper, losing money in a state where a healthy McDonald’s could bring in $750,000 to $900,000 in annual revenue, as much as $2.4 million in today’s dollars. Employees were “hanging out windows smoking cigarettes, giving free food to their friends,” he says. Even the coffee was terrible—no one was keeping the coffee-making gear clean.
At least the menu was blessedly simple, with about a third of today’s 100-plus items. “Back then, you could crank out a lot of burgers with 10-to-1 meat,” Jarvis says, referring to boxes of 10 burger patties per pound. He quarterbacked his staff from the fry station near the center of the store, becoming a stickler for following McDonald’s exacting standards for preparing food. “French fries were our bread and butter,” he says. “I wanted a fry person who, when the fries were seven minutes old in the fry basket, they would throw them away. It’s in the manual.”
He supported the local 4-H and joined the Kiwanis club, the country club, and a bowling league. He’s still in the bowling league (175 average, high game 256) but not the country club. “I found out the country club wasn’t as good for eaters as the bowling league,” he says.
Jarvis thought he could get the store into the black in six months; it took 18. One of his worst years was in the late 1980s, after the local Burger Chef went out of business. Without a rival down the block, “we didn’t have to work as hard,” he says. Service suffered. Customers went to Kalamazoo and Grand Rapids to try other restaurants. “I like competition,” he says. “It keeps families in town.”
By the ’90s, things were better, and annual sales were rising by the double digits. At headquarters in suburban Chicago, he says, “I was a hero.” He was also becoming a bit of a recalcitrant, shunning company meetings and conventions so he could mind his store: “I was more interested in building my own business.”
McDonald’s franchisees can be a cranky bunch, chafing under corporate dictates even as they embrace the brand. Some of the tension comes from conflicting agendas between headquarters and store operators. Although the company owns only 18 percent of its stores worldwide, it owns or controls the land and buildings for the vast majority. McDonald’s charges franchisees rent ranging from 8.5 percent to 15 percent of revenue, depending on location and other factors. It also collects a 4 percent royalty on sales, and franchisees contribute to national and local advertising funds.
So while McDonald’s focuses on the stores’ top line, operators worry about what’s left after paying rent, royalties, payroll, and other expenses. Generally, they do well. Jarvis declines to discuss his income, but it’s not unusual for owners to make six figures, according to Arturs Kalnins, a management professor at Cornell who studies franchising. An owner who regularly works in a McDonald’s can collect a manager salary of $108,000 on top of the store profit, he says.
The calculus gets more complicated when McDonald’s insists on, say, a new product such as McCafé coffee, requiring a $15,000 to $20,000 espresso machine. The franchisee, not the company, pays for it. On bigger projects such as store remodelings, the company sometimes shares the cost.
Everyone’s happy so long as a given investment attracts enough business to recoup the costs. Jarvis was delighted in 1998, after he paid to replace his original restaurant with one next door that included an enormous indoor playground. Families with little kids loved it.
The same year, McDonald’s expanded into its 114th country (Sri Lanka, FYI) and opened its 12,472nd U.S. location. But domestic sales were lackluster and franchisees restless. Customers were opting for what they saw as better-tasting burgers at Wendy’s and Burger King. Analysts urged McDonald’s to consider what else it could sell.
Even during those off years, Jarvis says his store did fine by adhering to Kroc’s QSCV doctrine: quality, service, cleanliness, and value. Jarvis says he leaned heaviest on the Q. “If I go to a restaurant and wait a few minutes and have a great meal, I’ll overlook a little more time,” he says. “If I have a bad meal, I’m never going back.”
In 2013, McDonald’s rolled out the McWrap. Executives hoped the salad-in-a-tortilla—years in the making—would entice millennials who were gravitating toward carnitas and fajita-veggie burrito bowls at
It took 20 seconds alone to steam a McWrap tortilla. Chicken had to be chopped and stuffed inside, along with sauce, bacon, lettuce, tomato, and cucumbers, depending on which of the nine varieties of McWrap a customer ordered. The whole thing then had to be rolled tight enough to fit into a slim cardboard box designed to make McWraps easier to eat while driving. Tortilla rolling turned out to be an inexact science. Sometimes the finished wraps were too big for the boxes and had to be rerolled. Fitting them in quickly and consistently “was a nightmare,” says Annette Snyder, who’s been general manager in the Hastings McDonald’s for more than 30 years. McWraps are now off the menu at about half of the stores in the U.S., including the one in Hastings.
McWrap was just the latest concoction to bog down Jarvis’s kitchen. His restaurant had been slowing since 2005, as McDonald’s expanded the menu with new salads, McGriddles, Fruit N’ Yogurt Parfaits, the Big N’ Tasty burger, and other items—some of which sold, some not, Jarvis says. McCafé beverages, which premiered across the U.S. in 2009—lattes, cappuccinos, mochas—were especially troublesome. Orders backed up as staffers changed 5-gallon bags of whole and skim milk at least once a day and juggled ingredients for dozens of drink variations on a single machine. Jarvis didn’t have room for two. “The drinks are all very good, but you have one machine, and it only makes the drinks so fast,” Snyder says. “It has really slowed things down.” McDonald’s says McCafé beverages have added $125,000 in annual revenue per restaurant.
The Dollar Menu, introduced in 2002, helped bring in customers during the Great Recession. But as beef and other commodity costs went up, Jarvis raised prices of some dollar items to $1.10 and $1.20—as is a franchisee’s prerogative—and “got harassed about it” by the company. “We were just losing money,” he says. And whether franchisees turned a profit or not, they had to pay royalties on the revenue.
At McDonald’s behest, Jarvis tried to keep his store open 24 hours in 2009. He figured he needed $100 an hour of revenue to break even, but he was getting only $15 or $20 from 2 a.m. to 4 a.m. He tried the always-open experiment twice and gave up both times after a few months. He did, however, like headquarters’ idea of adding a second drive-thru. Vehicles in the single lane had been backing up onto the highway. The new lane, which cost him $100,000 to build, paid for itself within a year. But even with the two lanes, lines of vehicles started building up again as his employees scrambled to make skinny vanilla McLattes.
By early 2014, after several years of slowing sales growth, Jarvis decided enough was enough. That March, during his annual operator’s review, he told McDonald’s he intended to sell both his stores.
“No business or brand has a divine right to succeed,” McDonald’s CEO Easterbrook said in a widely viewed company webcast on May 4. “The reality is, our recent performance has been poor.”
McDonald’s is still the biggest chain in the $222 billion U.S. fast-food market. And it has rallied from tough times before, most notably in 2003, under the “Plan to Win.” The company then de-emphasized opening stores in favor of luring more customers to existing outlets with better food and surroundings. It changed how its burgers were cooked to make them juicier. It also added items it said customers demanded: McGriddles, juice, and other nonsoda drinks, along with salads. It focused on friendlier and faster service and introduced its first global advertising campaign, “I’m lovin’ it.”
In his webcast and conference calls with analysts, Easterbrook said he wants McDonald’s to respond more quickly to food trends while improving service—by simplifying the company itself, reducing menu items, and shifting more day-to-day control to franchisees. McDonald’s is toasting buns longer, experimenting with delivery, rolling out a mobile app, gradually shifting to “cage-free” eggs, and testing touchscreen kiosks for customized burger orders. The kiosks have been favorably received in France and China. All-day breakfast could increase sales by as much as 2.5 percent, according to notes from an August presentation to franchisees by Mike Andres, McDonald’s U.S. president.
Easterbrook also plans to sell 3,500 of McDonald’s 6,700 company-owned stores to franchisees over the next three years. The company then would own about 10 percent of its restaurants. Burger King, by comparison, owns less than 1 percent of its stores; Subway, not a single one. McDonald’s would collect rent and royalties from those restaurants without having to manage them.
Investor Larry Robbins, CEO of Glenview Capital Management, has urged the company to spin off its property holdings into a real estate investment trust. Such a REIT—which McDonald’s executives haven’t ruled out—might unlock billions in cash the company could bestow on shareholders via stock buybacks and special dividends. Or the spinoff could distract management from efforts to boost sales and streamline restaurants, says Bloomberg Intelligence analyst Jennifer Bartashus. And if the stores don’t perform well, McDonald’s and its franchisees could be stuck paying rent under long-term leases.
Maybe there’s nothing McDonald’s can do to restore its mojo. With 69 million customers a day around the world, it’s hardly about to go out of business. Perhaps it will simply muddle on, generating royalties and rent as the Chipotles and Panera Breads of the world steal its customers. Cornell’s Kalnins offers an alternate possibility: that the retirement of people Jarvis’s age will make room for a younger, more energetic wave of franchisees.
The buyer of Jarvis’s outlets is Keith Berg, 41, a second-generation franchisee who already owns two locations. He says Jarvis ran “great stores,” so he hasn’t changed much yet. He retained Snyder, the general manager in Hastings. After asking employees what equipment they needed, he bought two digital labeling systems that help keep track of expiration dates on parfaits, salads, pies, and other prepared items. He plans to remodel the outside of the Hastings store and bought a machine that will let workers steam more buns and tortillas at once. “We need to continue to be a quick-service restaurant and also keep in mind what customers are asking for,” he says. For all-day breakfast—which customers have demanded for years—he says he’ll consider adding a worker or two at the grill for the lunch rush.
Jarvis says he’s put on weight because he’s not running around in his stores anymore. He visits the Hastings location most days to get a foo-foo coffee and see old employees and customers.
If he were McDonald’s CEO, he says, he’d get rid of the bagels, wraps, and salads and move the foo-foo drinks to standalone McCafés in strip malls. He likes the idea of using kiosks for custom ordering, which he says should improve order accuracy and reduce arguments with customers.
His final day as a franchisee was a Tuesday last November. He went to the Hastings restaurant that evening to meet Berg. They counted uniforms and emptied the safe of Jarvis’s cash. Berg wrote Jarvis a check for the inventory; Jarvis posed for a farewell photo with Snyder. He didn’t leave till after midnight. His eyes well up at the memory. “It’s like I sold my family,” he says.