5 Reasons Why Not to Buy Mcdonald's Franchise

Table Of Contents

1 Company Information and Business Overview:
2 McDonald’s Franchise Initial Investments:
3 Mcdonald’s Franchises Problem Areas:
4 Conclusion

Franchising is a business strategy that multiple industries, including fast food, have adopted. The QSR industry, in particular, sees many franchise chains dominating the market — Subway and McDonald’s, for example, and more recent brands like Five Guys and Slap FishShack. Consumers love these familiar names; however, healthy eating patterns or low-profit margins have pushed once-dominant chain restaurants franchises into hard times.

The recent controversy over salmonella in McDonald’s chicken has put the brand and franchises in a highly unfavorable spot in the media and consumers. Though the company has responded to the issue by including healthier food options, such as Crispy Chicken Sandwich, salads, and wraps, in their menu, it is likely that negative connotations regarding the company’s hygiene standards will continue.

Despite the popularity of the brand, recent times have been especially challenging for McDonald’s franchise. With falling stock prices and declining customer satisfaction rates, the company finds itself in the middle of a class-action lawsuit over racial discrimination against African American applicants.

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Company Information and Business Overview:

McDonald’s makes money by selling fast food through franchisees who operate on the property leased by the company, often at a considerable markup. McDonald’s total stores are around 38,695, out of which 36,059 are franchises. The remaining 2,636(7%) are company-operated outlets, whereas approximately 93% are franchises, below McDonald’s target of 95%.

Though McDonald’s has the advantage of predictable and stable income by leasing out the property to the franchises, Franchisees, on the other hand, are finding it difficult to earn good ROI on their investment.

McDonald’s offer the following four types of franchises:

Traditional Restaurant: Outlets at the freestanding building, storefront, food court, or other such location with a full-menu restaurant.
Satellite Locations: Outlets at the retail store, airports, universities, hospitals, serving a scaled-down menu of a McDonald’s restaurant along with other products.
STO and STR Locations: Outlets at fuel stations and operate on a whole McDonald’s menu. Small Town Retail locations are small retail centers in rural communities.
BFL Franchises: “Business Facilities Lease” franchises give franchises benefits that include the business facilities.

McDonald’s Franchise Initial Investments:

Here’s an estimated initial investment for a McDonald’s franchise:

Fee	Low	High
Initial Franchise Fee	$0	$45,000
Real Estate and Building – 3 month’s rent	Base Rent: $0, Percentage Rent: 0%	Base Rent: $229,000 Percentage Rent: 28%
Signs, Seating, Equipment, and Décor	$325,000	$1,550,000
Opening Inventory	$10,000	$39,000
Miscellaneous Opening Expenses	$46,500	$58,195
Travel and Living Expenses while Training	$3,000	$37,100
Additional Funds – 3 months	$80,000	$355,000
ESTIMATED TOTAL*	$464,500	$2,313,295

Apart from the initial investment, there are many variable costs like rent, service, advertising, promotion. McDonald’s franchise owners earn an estimated annual profit of roughly $ 135,000-150,000.

To evaluate the accurate profit of franchise owners, watch the video below, which gives you the potential financial model of how much profit is earned by franchise owners after making investment and operation costs.

Mcdonald’s Franchises Problem Areas:

We have researched through market trends, franchisee forums, their complaints and company FDD, and other policies to find out the challenges faced by McDonald’s franchises:

#1 Demand for Healthy Food Options:

The biggest challenge for McDonald’s in the present and future is not from its fast-food competitors but from consumers who demand a healthy and organic menu coupled with convenience.

The recent market trend in the QSR industry is shifting towards restaurants that offer fresh and high-quality food in an informal setting. These fast-casual restaurants are fast-growing in the QSR market, which fast-food giants like McDonald’s dominated for some time.

Fast-casual restaurants offer consumers a healthier selection of food at a slightly higher price than a consumer would be willing to pay. Hence, capturing a new segment with an initial investment of more than 20 lakh will yield a return only after 5-6 years.

#2 Fiction In Relationship With Franchisors:

Over the years, there have been many operational difficulties running the franchise. Owners claim that they pay millions to the parent company but cannot operate their outlets to their satisfaction. The franchise owners feel that they do not get enough freedom to run their business, resulting in huge losses. Also, the parent company has been accused of changing its policies without considering the interests of the franchisees.

Also, McDonald’s franchisees do not get territorial protection from any new franchise or a company-owned outlet in their area. Because of which the franchise may face competition from future franchises like Taffer’s Tavern, and Rise Biscuits And Chicken.

#3 Complaints Of Sexual Harassment At Mcdonald’s Outlet Affect The Hiring Process.

A wholesome family diner image of McDonald’s suffers greatly from complaints of hideous nature. Senior or owners are accused of sexual harassment from dozens of its workers, many of whom have filed lawsuits against the company. These allegations have contributed to a loss in stock value and decreased public confidence in the company. Moreover, many eligible candidates are reluctant to work at MACD outlets, leaving you only with inefficient staff.

#4 Reports of Racism Against Management of the Company

The NAACP has sued the company claiming that McDonald’s spent $1.6 billion on television ads yet spent only 0.31% of that sum on advertising with black media. The company has also been sued by a black franchise owner, who stated that the company gives more favorable treatment to white franchise owners. Today, buying franchising of the brand that condescends to racism is not ethically a good choice.

#5 Franchisees Frustrated with companies pandemic response:

McDonald’s leases out most of its restaurants, while franchisees pay the company rent. This has complicated things recently when the sales have been badly hit because of the pandemic. The company has been giving two-week extensions in payments where the other companies are providing reductions in rents. Tested through tough times, we recommend that the company that thinks about franchise owners is undoubtedly the right choice.

Conclusion

Fast food should be an as stable industry as any. With an ever-increasing eating trend, people want their food to be fresh and fast without spending much money. That said, buying the franchise of McDonald’s, known as a fast-food giant, does face a significant challenge that needs to be acknowledged before making a decision.

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5 Reasons Why Not to Buy Mcdonald’s Franchise