Home > economics, news > The economics of a McDonalds franchise

The economics of a McDonalds franchise

August 6, 2014

I’ve been fascinated to learn all sorts of things about how McDonalds operates their business in the past few days, as news broke about a recent NLRB decision to allow certain people who work in McDonalds to file complaints about their workplace and name McDonalds as a joint employer.

That sounds incredibly dull, right? The idea of letting McDonalds workers name McDonalds as an employer? Let me tell you a bit more. And this is all common knowledge, but I thought I’d gather it here for those of you who haven’t been following the story.

Most of the McDonalds joints you go to are franchises – 90% in this country. That means the business is owned by a franchisee, a person who pays good money (details here) for the right to run a McDonalds and is constrained by a huge long list of rules about how they have to do it.

The franchise owner attends Hamburger University and gets trained in all sorts of things, like exactly how things should look in the store, how customers should be funneled through space (maps included), how long each thing should take, and how to treat employees. There’s a QSC Playbook they are given (Quality, Service, and Cleanliness) as well as minute descriptions of how to organize their teams and even the vocabulary words they should use to encourage workers (see page 24 of the Shift Management Guide I found online here).

McDonalds also installs a real-time surveillance system into each McDonalds, which can calculate the rate of revenue brought in at a given moment, as well as the rate of pay going out, and when the ratio of those two numbers reaches a certain lower bound threshold, they encourage franchise owners to ask people to leave or delay people from clocking in. Encourage, mind you, not require. They are not the employers or anything remotely like that, clearly.

Take a step back here. What is the business model of a franchise? And when did McDonalds stop being a burger joint?

The idea is this. When you own a restaurant you have to deal with all these people who work for you and you have to deal with their complaints, and they might not like the way you treat them and they might organize against you or sue you. In order to contain your risks, you franchise. That effectively removes all of those people except one, the franchise owner, with whom you have an air-tight contract, written by a huge team of lawyers, which basically says that you get to cancel the franchise agreement for any minor infraction (where they’d lose a bunch of investment money), but most importantly it means the people actually working in a given franchise work for that one person, not for you, so their pesky legal issues are kept away from you. It’s a way to box in the legal risk of the parent company.

Restaurants aren’t the only business to learn that it’s easier to sell and manage a brand than it is to sell and manage an actual product. Hotels have been doing this for a long time, and avoid complaints and legal issues stemming from the huge population of service workers in hotels, mostly minority women.

For a copy of the original complaint that gave the details of McDonald’s control over workers, read this. For a better feel for being a McDonalds worker, please read this recent Reuters blog post written by a McDonalds worker. And for a better feel for being a McDonald’s franchise owner, read this recent Washington Post letter from a long-time McDonalds franchise owner who thinks workers are being unfairly treated.

Does that sounds confusing, that a franchise owner would side with the employees? It shouldn’t.

By nature of the franchise contract, the money actually available to a franchise owner is whatever’s left over after they pay McDonalds for advertising, and buy all the equipment and food that McDonalds tells them to from the sources that they tell them to, and after they pay for insurance on everything and for rent on the property (which McDonalds typically owns). In other words the only variable they have to tweak is the employer pay, but if they pay a living wage then they lose money on their business. In fact when franchise owners complain about the profit stream, McDonalds tells them to pay their workers less. McDonalds essentially controls everything except one variable, but since it’s a closed system of equations, that means the franchise owners have to decide between paying their workers reasonably and going in the red.

That’s not to say, of course, that McDonalds as an enterprise is at risk of losing money. In fact the parent corporation is making good money ($1.4 billion per quarter if you include international revenue), by squeezing the franchises. If the franchise owners had more leverage to negotiate better contracts, they could siphon off more revenue and then – possibly – share it with workers.

So back to the ruling. If upheld, and there’s a good chance it won’t be but I’m feeling hopeful today, this decision will allow people to point at McDonalds the corporation when they are treated badly, and will potentially allow a workers’ union to form. Alternatively it might energize the franchise owners to negotiate more flexible contracts, which could allow them to pay their workers better directly.

Categories: economics, news
  1. mb
    August 6, 2014 at 8:51 am

    The franchise owner could always choose to open an independent restuarant. Why progressives feel the need to choose sides in a business contract is beyond me. As for the employees, McDonald’s is testing an app that allows you to order from your phone, other restuarants (Panera) have touch screens instead of cashiers. Have you noticed the amount of automation that McDonalds has incorporated in the 30 years (do you even see a grill now? how about someone manning the fries?…). Drinks are now mostly self serve (no more people manning the drink station). I could go and on and on and on… but the point is – payroll is the biggest cost at McDonalds (even more than food) – and one of the things that franchisees pay for is all the automation that McDonalds can buy (spreading the cost over thousands). Capital can be substituted for labor, raising the cost of labor will make more automation cost effective. The first to go will be the cashiers, their time is number anyway – making them more expensive just makes the apps more attractive.


    • August 6, 2014 at 8:54 am

      I agree, some of this stuff will be automized. And I also agree that there’s only a limited amount of energy I have for protecting terrible jobs. But then again, you can’t claim that the big corporations haven’t gamed the system with these legal constructs. I’m fascinated to see if there’s a way to challenge that gaming.


      • cat
        August 6, 2014 at 11:04 am

        “I also agree that there’s only a limited amount of energy I have for protecting terrible jobs”

        These jobs are only terrible because the workers are being exploited. These would be great jobs if they were making $15 an hour and had legal protections and/or a union.


        • August 6, 2014 at 11:38 am

          Great point! Would be great to see these jobs worth protecting.

          On Wed, Aug 6, 2014 at 11:04 AM, mathbabe wrote:



    • RW Force
      August 7, 2014 at 2:40 pm

      Automated cashier already on duty in Paris’ McDonald’s. Enter your order on a touchscreen, run your credit card, pick up at counter.


  2. Gordon
    August 6, 2014 at 9:14 am

    Your characterization of the franchise business model is a bit limited: getting around an obligation to deal with people who work for you isn’t the only reason to sell franchises instead of operating company owned stores.

    Without being exhaustive about the reasons to follow this route, franchising serves two important functions: the first is that it transfers the operating risk to the franchisee, who also funds the growth capital. That allows the parent company to grow faster than they might otherwise be able to if they were relying on internally generated funding; it also enables an asset-lite model, with very high returns on invested capital, to run efficiently.

    The second function is probably more important in the long run, and Megan McArdle has a good explanation of it on Bloomberg View (http://www.bloombergview.com/articles/2014-08-01/unions-are-lovin-mcdonald-s-labor-ruling): a franchisee who owns his business will operate it better than a manager who doesn’t have the same personal investment in his store.

    I won’t speak to the motivations of the employees at the store level, because I appreciate that they might not have the same range of options, and that many of them are looking for the least bad choice rather than making a positive decision about how to maximise their well-being – I don’t think the argument that they have to deal with a type of coercion is ludicrous on its face, although you could reasonably argue about who is exerting that coercive force.

    None of that is true of the franchisees, though: ultimately, whatever you think of the nature of the model, franchisees buy into it because they think it’s a good investment. It’s a contract that’s freely entered into, with buckets of legally mandated disclosure on both sides, and even more information available to prospective franchisees beyond what’s legally mandated. Some of those investment decisions work out very well, and others don’t, but to complain about the nature of the contract that they sign after the fact just isn’t a mature response to their individual investment experience.


    • August 6, 2014 at 9:22 am

      I agree that I’ve focused on the labor side of things, and that the other issues you bring up are valid. But yes, I do think you can complain about terms of a contract! It’s not a question of maturity, to me it’s a question of how deeply you question assumptions. In my case, I like to question all of them, including how the legal system is working for the corporation and against labor and franchise owners. Just because someone signed a contract doesn’t make it fair.


    • ScentOfViolets
      August 6, 2014 at 9:43 am

      You just shot all of your credibility by linking to McMegan Arglebargle. You know, the woman who once was off by an order of magnitude then blamed it on her calculator, saying she didn’t realize it “didn’t go that high”? Sheesh.


      • ScentOfViolets
        August 6, 2014 at 9:43 am

        Sorry, that’s a reply to Gordon.


    • cat
      August 6, 2014 at 10:50 am

      “The second function is probably more important in the long run, and Megan McArdle has a good explanation of it on Bloomberg View (http://www.bloombergview.com/articles/2014-08-01/unions-are-lovin-mcdonald-s-labor-ruling): a franchisee who owns his business will operate it better than a manager who doesn’t have the same personal investment in his store.”

      I will try not to be mean, but its hard when you link to someone like Megan McArdle.

      Of the 3-4 franchise fast food places I’ve worked while in High School and College, every single manager cared about the place as much as the Owner and in some cases more. Why? These were people who had chosen this as a career and Store Manager was a stepping stone to Store Owner. Most franchises won’t let you buy one without successfully running a store for some time as the Store Manager.

      One franchise I worked at had a good owner, who had all 5 of the stores in the county, and then sold that set to move to another state to buy a larger set of stores. The new owner was terrible. They bought the set with their parents money, not money they earned from being successful. Maybe it was a coincidence, but stores did terrible after that.


    • Matthew G. Saroff
      August 7, 2014 at 1:38 pm

      Gordon, while your comments about offloading liability and easing the raising capital are valid, on the second point, I must note that, if you choose to quote Megan McArdle, you need to be aware of certain rules:

      1. Megan McArdle is always wrong.

      2. Any statistics given, and any mathematical analysis given, is suspect and needs to be independently confirmed.

      3. Megan McArdle will always apply a Randian/Objectivist position, and cherry pick data, and manipulate data to confirm this.

      4. See rule 1.

      These rules have never failed me (though past performance is no guarantee of future performance), and in a battle between her and Amity Shlaes, I would be hard pressed to pick a loser.

      I have no doubt that McMegan believes that because the franchisee has skin in the game, they work harder, and I have no doubt that many people at McDonalds believe this, but until I see a peer reviewed study in a microeconomic or behavioral economic journal, I am not inclined to take this as anything but a commonly held mythology.

      After all, behavioral economists (Dan Ariely has mentioned this frequently) demonstrated through a controlled study that extremely high compensation decreases performance, so while “common wisdom” of the Ayn Rand variety may be common, there is no evidence that it is wise.


      • Gordon
        August 7, 2014 at 2:25 pm


        This is the most delightfully phrased ad hominem response I’ve received to date on this topic. Frankly I had no idea that a reference to Megan McA., whom I couldn’t tell from a hole in the ground, would elicit such profoundly emotional replies, but it wasn’t until you were kind enough to spell out Rules #1 and #4 that I realized why I shouldn’t have been surprised.

        I’ve been fairly closely involved with two companies that operate a mix of franchise and corporate stores in sectors that aren’t completely dissimilar to McDonald’s. The right way to operate and expand those chains has been a frequent topic of discussion amongst managers, employees, directors and shareholders. A host of considerations is typically debated – the best uses for capital, whether cash flow or ROIC is a more important metric, the trade off between operating leverage and cash flow volatility, local market knowledge versus the ability to develop and migrate best practices and so on.

        The one issue that I’ve literally never heard raised is the problem of having to,

        “…deal with all these people who work for you and … their complaints, and [the fact that] they might not like the way you treat them and [so] they might organize against you or sue you. In order to contain your risks, you franchise.”

        Clearly Rule #1 (and #4) renders the belief about franchisees operating stores better than corporate managers invalid, notwithstanding that MM was appealing to an authority of her own rather than putting forth her own analysis. However, the specific point that I was hoping to make wasn’t that franchisees always operate better than employees, but that managers might have motivations for franchising their stores other than the narrow avoidance of a unionized workforce.

        Of course, it’s possible that Rules #1 and #4 can be construed broadly enough to rubbish that point in turn: perhaps MM’s having ever thought about a topic at hand is enough to upend the possibility of civilized disagreement among reasonable people. Sure, why not? However, even in the face of such powerful logic and overwhelming moral force, I’m unwilling to junk my own experience in its entirety, and for the time being I’m going to cling to the wreckage of my recollection that a deep aversion to unionized employees isn’t the sole reason to sell stores to franchisees.

        Finally, thanks very much for the reference to Amity Shlaes; I’m embarrassed to admit that I’d never heard of her until now, but clearly this is a lacuna in my cultural awareness that needs filling, and I’ll correct that deficiency forthwith.


        • ScentOfViolets
          August 8, 2014 at 9:05 am

          It’s been explained to you multiple times why McMegan is not a viable source. If what you have to say is valid, I’m sure you can find someone else to cite. Oh, and in the interests of not having this conversation again — no, Heritage, Cato, et. al. are not valid cites either.


        • Gordon
          August 8, 2014 at 9:38 am

          Sigh. I know it was a long reply, but do try reading it before your knee jerks quite so reflexively.


        • ScentOfViolets
          August 8, 2014 at 10:23 am

          Please quote where I ‘reflexively knee-jerked’. This shouldn’t be hard to do and it would save time in the future if you engaged in more showing and less telling.


        • Gordon
          August 8, 2014 at 10:37 am

          SOV – I was really thinking about the part of my response in which I disavowed any reference to MM and instead recounted my own experiences with franchise companies… which is why your own reference to MM came across as reflexive rather than considered.

          I realise that this conversation is probably getting a little tedious for others on the thread, but I can bore you to death with the differences between franchised and corporate stores that don’t involve union considerations off-line if you’d like to email me… gordon dot henderson at post dot harvard dot edu. And I promise not to mention Megan, unless I think it would be funny to.


        • ScentOfViolets
          August 8, 2014 at 10:43 am

          Sigh. Let me show you how this quote thing works. You said: This is the most delightfully phrased ad hominem response I’ve received to date on this topic. Frankly I had no idea that a reference to Megan McA., whom I couldn’t tell from a hole in the ground, would elicit such profoundly emotional replies . . . In fact, this is not ad hominem; McMegan’s innumeracy is well known. See for example my point where she blamed her calculator for ‘not going high enough’. It follows that citing her will not be persuasive.

          See? That’s how it’s done. It’s not a hard procedure to follow, nor difficult to comprehend. Now please — don’t cite McMegan, Heritage, Cato, et. al., okay?


        • Matthew G. Saroff
          August 8, 2014 at 12:45 pm

          You are missing my point.

          I am saying that MdMegan has a long history of being a thoroughly unreliable source on, well, pretty much anything.

          Additionally, she cheerfully acknowledges that the is a hard core Randian (she started blogging as Jane Gault), and that it is at the core of her analyses.

          This means that if one is so inclined, or drunk enough, one can use her statements as a jumping off point, but one must independently verify everything that she writes in order to present a credible argument.


  3. Guest2
    August 6, 2014 at 10:34 am

    Are these reasons for the workers themselves to OWN the franchise? the local means of production?


    • cat
      August 6, 2014 at 10:55 am

      They don’t own the means of production, they own a tiny cog in the production chain where they take on most of the risk and share little of the rewards as the franchiser is skimming off the top of every service they force you to buy.

      Its like piecework in the garment industry, saloon’s who force the stylists to rent the chairs/equipment, or dancers who are charged stage fees.


  4. That guy
    August 6, 2014 at 11:32 am

    In Canada they hire ‘temporary’ foreign workers so as to skirt labour laws.


  5. mathematrucker
    August 6, 2014 at 11:41 am

    I find it interesting how so many people equate being party to a contract with maturity. Frankly I hate and avoid them at every turn, and I don’t feel the least bit immature in doing so. Being able to turn the knobs of the legal system in your favor isn’t a sign of maturity, it’s just a sign that you know how to turn those knobs.


  6. David18
    August 6, 2014 at 11:50 am

    I love the soft serve ice cream cones at MIckyD’s! You can get the all over the world 🙂

    Higher labor costs does probably mean higher junk food costs which would shift the demand curve away from junk food (at least this junk food) potentially improving people’s health. In fact, perhaps Health and Human Services should help with unionization of junk food restaurants…:-)

    Paying more money for employees and having union representation would probably result in lower employee turnover, etc.

    Starbucks seems like a clean, well run, restaurant chain that offers their employees a reasonable health plan and they are *not* franchise run. So I’m not sure I buy McArdle’s Prof’s argument that franchise owners will run the places better than professional managers. I think you just have to spent enough money to hire good people with low turnover.


  7. Anon
    August 7, 2014 at 12:42 pm

    Sounds like we need to institute unionization for franchise owners.


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