Capital spending requirements put franchisees in a tight spot

McDonald's Headquarters

McDonald’s has instituted a turnaround plan involving burger customization that may impose up to $125,000 in new investment costs on already struggling franchisees, according to the Wall Street Journal. The $125,000 price tag for McDonald’s burger customization program follows renovations undertaken by about half of McDonald’s restaurants in the past decade, which cost participating franchisees upwards of $650,000. The capex requirements exacerbate the combination of falling sales and rising payments to McDonald’s that have been hurting franchisees’ bottom lines. According to the Journal, McDonald’s operators are having difficulty meeting the company’s financial requirements, such as maintaining certain cash-flow-to-debt ratios.

The other big burger chains are also requiring franchisees to make major investments, and franchisors’ ability to impose large capex costs on franchisees is common in the franchise industry: The Service Employees International Union’s analysis of franchise agreements across the franchising industry in a recent petition to the Federal Trade Commission shows that franchise agreements typically allow franchisors to impose major expenditure mandates on franchisees. The review of 14 top franchise chains’ franchise agreements – including McDonald’s, Subway, Great Clips and Holiday Inn – found:

  • All but one of 14 allow the franchisor to impose capital expenditures on franchisees during the term of the agreement.

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