Survey: Affordability does not equal discounting

Small restaurant franchisees endangered?

Despite a return to promoting value, with various versions of “McPick2,” a new consumer survey ranks McDonald’s only sixth on affordability among 12 major burger/sandwich chains. This a drop from its fifth-place ranking on the last survey, in 2014, conducted for investment firm RBC Capital markets. The surveyed companies included national competitors Burger King, Wendy’s and Sonic along with largely regional chains such as In-N-Out Burger and Culver’s.

The results challenged the idea that chains have to discount heavily to be seen as affordable, an approach McDonald’s Owner/Operators have been complaining about for years. In-N-Out and Chick-fil-A were ranked the top two most affordable chains — and also among the highest in average spend per visit. “Stable and compelling core menu prices seem to be working well” for those companies, rather than discounting and value advertising, according to RBC investment analyst David Palmer.

Palmer contends that moves to improve the perception of McDonald’s food quality – such as cage-free eggs and antibiotic free chicken – “will be a multi-year journey with slow improvement in perception rather than a quick and dramatic fix.”

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Expanding All-Day Breakfast Strains McDonald’s Franchisees

mcdonald's arches sign

In a move franchisees fear will create even more operational headaches, McDonald’s is now offering its full breakfast menu all day at over 150 locations in the Tulsa, Oklahoma area and the Triad region of North Carolina, and is adding McGriddles to the all-day menu at 1,000 additional stores throughout the South.

When the chain launched all-day breakfast in October, it limited the breakfast menu after 11:00 AM, in part to reduce the operational complexity associated with executing over 100 menu items. Even with the limited menu, franchisees reported backed up kitchens, with one franchisee describing “people falling over each other and equipment jammed in everywhere.” Operational complexities lead to staffing concerns, with one franchisee worried that all-day breakfast would require additional hiring, and another noting that the program has “caused management turnover, and crew turnover out of frustration.” One franchisee felt her store would lose customers over the initiative because of slower service times and lower quality food.

If McDonald’s moves forward with a fuller breakfast menu all day, it may only create more difficulties for franchisees. For example, owner/operator LeAnn Richards, who led a task force on all-day breakfast, points out the complexity of serving just one of the breakfast items,

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Small restaurant franchisees endangered?

Small restaurant franchisees endangered?

Private equity firms and other large investors are taking over more and more franchised restaurants, contributing to a shift toward larger operators that may threaten the future of smaller and even medium-sized franchisees.

Franchise Times reported in 2015 that the country’s largest 200 restaurant franchisees operated over 23,000 restaurants, or an average of 116 units. Ten years ago, franchisees in the top 200 owned 78 units on average. In other words, the big restaurant operators have gotten bigger by nearly 50 percent over the period.

As larger operators grow, some smaller franchisees leave. Rick Ormsby, co-founder of investment bank NDA Inc., which specializes in the sale of YUM! Brands units (Taco Bell, KFC, and Pizza Hut) reports that 25-30 percent of YUM! operators with 10-15 units or fewer have left the system over the past four or five years.

Even medium-sized franchisees are losing ground, according to Franchise Times: “Many of the franchisees on the Restaurant 200 are getting bigger not by purchasing these mom-and-pops, but because they’re buying out mid-scale operators with 10 to 20 locations. These franchisees are retiring or simply getting out of the business.”

According to Nation’s Restaurant News,

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Why Aren’t More Franchisees on Company Boards?

boardroom image

A blog post on the Nation’s Restaurant News site has raised a great question: “Franchisees spend a lot of time and energy, and their own money, investing in a brand. So why aren’t more of them on company boards?”

As NRN’s Jonathan Maze noted, franchisees’ interests are not always the same as franchisors:

“…franchisors make their money from franchisees’ top-line revenues because they take a percentage of those revenues as royalties. Franchisees prefer making a profit. And they prefer simpler operations. Those can go against what a brand might want.”

As we reported, this summer restaurant chain Famous Dave’s added California franchisee Anand Gala to its board. “As more brands move to an all-franchise model they have very little skin in the game,” Gala told NRN recently, explaining the importance of the franchisee perspective. Continue Reading