McDonald's CEO Chris Kempczinski believes his chain is the best franchisor in the restaurant industry, and he knows that can only be true if he also has the best franchisees.
To ensure the latter part of that statement is true, the chain recently implemented a series of changes that raises standards and improves access for those wanting to join the system.
McDonald's will now choose new operators equally as opposed to preference being given to family members, and operators will undergo a more rigorous process every 20 years to maintain ownership of restaurants, according to the Wall Street Journal. These regulations are on top of a new grading system called Operations PACE (Performance and Customer Excellence). As part of the new program, franchise locations will be visited six to 10 times per year by company and third-party assessors, CNBC reported. All of these changes are scheduled to begin January 2023.
In terms of greater accessibility, McDonald's announced late last year that it would spend $250 million in the next five years to attract more minority ownership. It plans to do so by lowering upfront financial requirements and loosen rules around traditional financing.
"Everything that was announced is about, for us, continuing to make sure that we are going to be the best place for the best franchisees," Kempczinski said during McDonald's Q2 earnings call. "You only get to make those announcements in my view when you're doing it from a position of strength. And that's what we've got in the U.S. right now, earned over the last several years through our performance."
Franchisees have expressed disapproval with the new ownership guidelines. The National Owners Association, an independent advocacy group for McDonald's operators, found in a survey of roughly 700 members that 87 percent support a "no confidence" vote on Kempczinski and U.S. president Joe Erlinger. McDonald’s ended Q2 with about 12,800 U.S. franchised restaurants, or about 95 percent of the domestic system.
Kempczinski said strong-performing operators will embrace the changes because they bring opportunities to grow and stability around equity. For franchisees that aren't doing well, he acknowledges that recent announcements probably do raise concern.
"But the U.S. team, I know is committed to helping improve there, and I would be delighted to see that if we can get improvement in maybe some of the lower-performing franchisees," the CEO said. "But broadly, I would say our relations with our franchisees globally, the 5,000 franchisees, is strong. And when we're a great franchise, when we're great franchisees, this business tends to do pretty well over time."
The executive said many existing franchisees are looking to buy new stores and pass ownership to their children and that demand from prospective operators is outstripping supply. Both scenarios make McDonald's a better business, Kempczinski said.
However, the CEO knows some are leaving the system, as well. For instance, Florida-based Caspers Company, which began franchising in 1958, announced in early July it was selling its 60 stores back to McDonald's. Kempczsinski said operators are doing so to take advantage of the chain's strong health and get multiples of 8-10x, the best rate he's seen in recent memory.
"There are some people looking at taking money off the table right now, but they're doing it at incredible multiples," Kempczinski said.
McDonald's U.S. same-store sales rose 3.7 percent, fueled mostly by growth in average check, which was driven by menu pricing in the high-single digits. All dayparts, except for late night, have seen 20 percent growth on a three-year stack.