Burger chain offers to pay 55% of the costs of restaurant changes.
McDonald’s Corp. MCD +0.76% really wants its franchisees to help change everything from the way customers order their food to the way employees provide service. When McDonald’s imposes changes on its restaurants, it normally expects its franchisees to bear the brunt of the expenses. But in an effort to regain the core customers it has lost to rivals, the company is trying to get franchisees on board by ponying up a big chunk of the money for upgrades that can cost anywhere from $150,000 to $700,000 per location.
The burger giant recently told investors that it lost 500 million U.S. orders over the past five years—mostly to other fast-food chains, rather than to the fast-casual restaurants it was trying to emulate with healthier offerings such as sandwich wraps and salads.
The company said it was hunkering down to focus on winning back its core customers on the lookout for low-cost food. Upgrades would involve installing self-order kiosks, upgrading dessert counters, buying new employee uniforms, and installing table-locator technology that enables employees to bring customers’ food to the table.
The company is offering to pay 55% of the costs associated with what it is calling the “Experience of the Future” initiative, according to a commitment letter McDonald’s sent to U.S. franchisees Wednesday, which was reviewed by The Wall Street Journal.
A McDonald’s franchisee who asked not to be identified because of company policy prohibiting franchisees from speaking publicly, said the company’s move is “unprecedented,” not only because of the level of investment McDonald’s is kicking in, but because the upgrades are part of a “holistic” plan, rather than a piecemeal approach to upgrading equipment or décor.
Another McDonald’s franchisee estimates about half of the company’s U.S. restaurants are outdated and many franchisees haven’t wanted to put up the money to upgrade them, something that was difficult to do in recent years as sales lagged.
In the past, the company has paid up to 40% of franchisees’ remodeling costs and sometimes more for smaller upgrades, according to people familiar with the matter.
Underpinning the upgrades is the renewed emphasis McDonald’s is placing on offering its food at affordable prices.
The company is making its funding dependent on franchisees’ approval of national advertising to support a new value menu of items priced at $1, $2, and $3 set to launch in January. And McDonald’s said in the commitment letter that the efforts won’t work unless a significant number of franchisees sign it. If franchisees representing 67% of McDonald’s more than 14,000 U.S. restaurants don’t sign the letter by October, the company won’t help fund the upgrades.
In the letter, McDonald’s said it would reduce or eliminate regional value deals as it develops the one, national value program. It has experimented with a number of value meals at different price points around the country, but found it was too confusing for customers to compare their deals with those offered by rivals.
The company has recently turned the corner, especially in its key U.S. market, where its sales growth in the first quarter exceeded analysts’ expectations.
But in order for that momentum to continue, McDonald’s said in the letter, a “key component” of its growth plan is “transforming how customers experience our brand by modernizing the interior and exterior of our restaurants and leveraging hospitality and technology to enhance our customers’ experience.”
McDonald’s also is offering franchisees a break on the expenses they’re required to contribute to a national advertising fund and a $20,000-per-restaurant incentive if franchisees increase their guest counts significantly.