McDonald's black franchisees are fighting to earn as much as their white counterparts, as dozens leave the company they once considered family
Samantha Lee/Business Insider
- McDonald's black franchisees make hundreds of thousands of dollars less a year, on average, than their white counterparts at the fast-food giant.
- Black franchisees say their stores net $68,000 less a month, on average, than McDonald's overall franchisee average. That disparity has more than doubled in recent years.
- Larry Tripplett, the head of McDonald's black franchisee group, the National Black McDonald's Owners Association (NBMOA), said in an internal letter earlier this year that "the trajectory of the treatment of African American Owners is moving backwards."
- McDonald's black franchisees told Business Insider they're limited to owning stores in areas where sales are lower and costs are higher.
- In 2008, McDonald's had 304 black franchisees, according to internal documents. Today, franchisees say there are fewer than 200 black franchisees, as McDonald's overall franchisee count drops.
- Former CEO Steve Easterbrook's efforts to modernize McDonald's proved expensive for franchisees, making it difficult for those with fewer restaurants or less profitable locations - including many black franchisees - to stay in the business.
- Some franchisees say they're concerned about the decline in the number of black people in corporate leadership.
- McDonald's said in a statement to Business Insider that it "is among our top priorities that all McDonald's franchises in all communities have the opportunity to prosper, grow and achieve their business ambitions."
- "Working in collaboration with McDonald's, we both are committed to delivering world-class hospitality, operational excellence, and increasing guest visits," NBMOA's Tripplett said in a statement. "We are working together to make the McDonald's brand shine by fully integrating African Americans at all levels. We both recognize that when we move together; we move further. And we are encouraged by our progress."
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Many black McDonald's franchisees say they consider the fast-food giant to be a sort of McFamily. They have "ketchup in their veins," dreaming of passing locations of the fast-food chain down to the next generation.But over the past decade, black franchisees have watched the disparities between them and the rest of McDonald's franchisees grow. Dozens have left the chain as surviving as a franchisee has become increasingly difficult for all but the ultrawealthy.
This disparity has been getting worse. Back in 2012, the gap between the averages was less than $24,600. In 2017, the cash-flow gap was about $60,600, according to documents from the National Black McDonald's Owners Association. Business Insider was unable to obtain official updated figures for 2018 or 2019, but two franchisees say the gap has since grown to about $68,000.
Shayanne Gal/Business Insider
As the disparity grows, black franchisees are cutting ties with McDonald's. At the end of 2008, there were 304 black McDonald's franchisees, according to NBMOA documents. By the end of 2017, NBMOA documents showed that number had dropped to 222. Today, two franchisees said, black franchisees make up fewer than 200 of the roughly 1,700 franchisees at McDonald's.Business Insider spoke with four black franchisees who left McDonald's in the past three years, as well as one franchisee who is still at the company. These conversations - along with interviews with McDonald's corporate employees and internal documents from the NBMOA, the National Owners Association, and McDonald's corporate obtained by Business Insider - describe a system in which black franchisees are at a systematic disadvantage.Under the leadership of Steve Easterbrook, who became CEO in 2015 and was terminated in November of this year, a black franchisee's situation, on average, grew significantly worse compared to the overall franchisee base.
"In general the trajectory of the treatment of African American Owners is moving backwards,"
"In general the trajectory of the treatment of African American Owners is moving backwards."
NBMOA CEO Larry Tripplett said in a letter to McDonald's east and west zone presidents in March, a letter obtained by Business Insider. "Through no fault of our own we lag behind the general market in all measures."In a statement to Business Insider, Tripplett said the NBMOA was encouraged by the process seen at McDonald's. The organization declined to comment on specific documents shared in the article, which were not provided to Business Insider by the NBMOA itself.
"The National Black McDonald's Operators Association (NBMOA) is the largest African American organization of established entrepreneurs in the country," Tripplett said in a statement. "Our goal is to ensure that McDonald's Corporation (McDonald's) is fully and authentically engaged in the African American experience - including African American communities, employees, vendors and franchisees."
"Working in collaboration with McDonald's, we both are committed to delivering world-class hospitality, operational excellence, and increasing guest visits," the statement read. "We are working together to make the McDonald's brand shine by fully integrating African Americans at all levels. We both recognize that when we move together; we move further. And we are encouraged by our progress."McDonald's said in a statement to Business Insider in late November that it "is among our top priorities that all McDonald's franchises in all communities have the opportunity to prosper, grow and achieve their business ambitions."
The 'numbers don't lie'
Just a few hours after the world learned that ex-CEO Steve Easterbrook had been unceremoniously terminated, Kempczinski wanted to tell Tripplett that he was committed to working with the black franchisee organization, according to an email Tripplett sent to NBMOA members that was viewed by Business Insider. Kempczinski also said he planned to continue efforts to reduce the cash-flow gap, or how much less black franchisees were making a month compared to McDonald's franchisees on average.McDonald's did not respond to Business Insider's inquiry about Kempczinski's conversation with Tripplett or the cash-flow gap, but the company said that leadership meets regularly and works closely with franchisees and diversity support groups including the NBMOA, the McDonald's Hispanic Operators Association, the Asian McDonald's Operator Association, McDonald's Owner Operator Pride Network, and the Women Operators Network. Representatives for these support groups did not respond to Business Insider's request for comment.Financial figures listed in NBMOA documents obtained by Business Insider paint a disturbing picture of just how large that gap between black franchisees and the rest of the company has become.
From 2012 to 2017, the gap in cash flow between black franchisees' average and the overall average more than doubled, according to a 2018 NBMOA presentation seen by Business Insider.
The average cash flow at black franchisees' locations was $319,381 - or $24,591 less than the overall average cash flow (which includes black franchisees' financials) in 2012. In 2017, black franchisees' average cash flow was $311,515 - or $60,581 less than the average cash flow of all franchisees, according to NBMOA documents.
Shayanne Gal/Business Insider
"The cash-flow numbers don't lie," said Ken Manning, a black former McDonald's franchisee and one of two people who said the cash-flow gap has now grown to about $68,000.
Manning started working at a McDonald's location four decades ago, making $1.65 an hour. He became a franchisee in 2001, when, he said, more McDonald's locations were available for black franchisees to buy thanks to a handshake parity deal between McDonald's and the NBMOA in the late 1990s. Eventually, Manning owned 16 locations. Yet, he says, the disparity between black and white franchisees was a constant."I've been around 40-plus years," Manning said. "The gap has always been there."
"I love the system, but at the same time," Manning said, "to see some of the inequities, it's disheartening. And I can't sit there and not say something."
Why black franchisees make less than their white counterparts
Manning and three other franchisees, one of whom is still at McDonald's, said many factors systematically disadvantaged black franchisees. Two former corporate employees confirmed these disparities to Business Insider. The NBMOA has presented similar concerns to McDonald's leadership in recent years, according to leaked documents, backing these worries with financial data.Former corporate executives and a current franchisee spoke on the condition of anonymity.A fifth black franchisee, Danita Joyner, who sold her last location in 2018, said she'd never encountered these issues and her experience with McDonald's was overwhelmingly positive.
Sources say black franchisees are significantly more likely to own locations where sales are lower and costs such as security are higher. A number of factors contribute to this, including that black franchisees are historically more likely to own stores in predominantly black and Latino communities, there are particular locations available for black franchisees to purchase, and franchisees interact in informal networks.
Several black former franchisees said that they were limited to buying these locations in part because they were not part of what Manning described as McDonald's "old boys' network." A former high-ranking McDonald's corporate employee said that while "race is not the driving factor," it is accurate that black franchisees tend to end up with restaurants that are "less desirable," in regions with average higher costs and lower sales.McDonald's has the right of first refusal when franchisees are selling locations, but most franchisees seeking to buy new locations acquire them from other franchisees. In 2018, there were 1,088 franchise transfers within the system, according to franchise disclosure documents. In comparison, just 240 locations were opened, relocated, or sold to franchisees by McDonald's corporate in the US in the same period.
Certain franchisees, most of whom are white, have built up business relationships within the McDonald's system over generations. Meanwhile, several black franchisees said they felt like they were playing catch-up without the same level of financial liquidity or ongoing relationships with legacy white franchisees.
"The white guys are keeping the stores in white hands,"
"The white guys are keeping the stores in white hands"Manning said. "And the black guys are keeping the same bad stores in black hands."
Once, Manning said, a white franchisee was given the chance to open up a new store near one of Manning's existing locations before he was alerted about the plan or given an opportunity to buy the location.Another time, Manning recalled that he asked corporate officers if there were locations available for sale in Charlotte, North Carolina. Manning was serving as a franchise-relations lead and knew that black operators in the area were hoping to buy more locations. According to Manning, McDonald's corporate said there were no locations for sale. A few days later, McDonald's announced that a white woman was set to buy locations in Charlotte - one of which was down the street from the black franchisee who was looking to buy more locations.
Manning said this is the "lack of trust that causes you not to believe or trust that they're looking out for your best interests."These concerns have simmered at McDonald's for decades, occasionally bubbling over in a lawsuit or clash between the NBMOA and the corporate office.In 1984, Charles Griffis filed a racial-discrimination suit against McDonald's, alleging that he and other black franchisees were systematically kept from buying stores in white neighborhoods and were restricted to poor, predominantly black areas.
''My stores are in hellholes,'' he told The New York Times at the time. ''They get robbed once or twice a month, and I pay $20,000 a month in security services they don't pay in good neighborhoods. We had a murder in one and we still get the windows smashed and the bathrooms vandalized. I've upgraded my stores a lot and I don't see why I shouldn't have a shot at a store in a good neighborhood.''
McDonald's paid Griffis $4.7 million in what the franchisee's lawyers characterized as a settlement. McDonald's general counsel told The Times that it had bought back the restaurants, calling Griffis' claims "bogus."More than three decades later, Juneth Daniel shared similar concerns with Business Insider after selling her locations in 2018. Daniel said that two of her three stores in Alabama were robbed multiple times, once at gunpoint. The high rent at the one store that was not regularly dealing with violence meant that, even at that location, she struggled to break even.
"Historically, we're always taking on the worst stores," Daniel said. "They had the lowest cash flows. ... They had serious problems with having to be staffed - if they weren't being robbed. But, you want into the system, you want it to be a McDonald's owner-operator. So you took the bad to hopefully get to a better place."
McDonald's said in a statement: "Building a robust and transparent marketplace for the buying and selling of restaurants that maximizes the potential for all franchisees to grow is a top priority. McDonald's is a fair and equitable company for all people, including people of color, and uses data and facts to support a robust process that drives decisions regarding restaurant sales."Manning said that he understood that McDonald's seeks the "best" franchisees for the job. But he said he felt McDonald's reliance on financials helps guarantee that wealthier, white franchisees are more likely to have a chance to buy stores with higher sales, feeding into a vicious cycle that hurts black franchisees.
He added: "It doesn't mean you can't do it. It just means that you may not have the resources to do it."
McDonald's franchisees have historically been treated as 'second-class citizens'
On average, black franchisees own locations with lower sales and higher costs than McDonald's overall average. These locations are more likely to be in lower-income areas and areas with more black and Latino customers.According to Georgetown professor Marcia Chatelain, who wrote the coming book "Franchise: The Golden Arches in Black America," there is a long history of businesses in predominantly black and Latino neighborhoods having higher insurance and security costs when all other things are equal."A franchisee of color is more likely to do business in a community of color and therefore they have higher carrying costs," Chatelain said. "When you think about the franchising system, everyone imagines that the burger you get in one store is the same burger you get in the other, which is true. But the cost to the franchise owner to deliver that burger at the same or comparable prices is very different."
Rents, which are typically a mix of a base rent plus percentage of sales, can weigh heavily on black franchisees.
In his March letter, Tripplett called for a permanent rent reduction in the Atlanta market, a region where franchisees have struggled with cash flow and where black franchisees are over-represented compared to the rest of the country. Daniel, whose Alabama locations fell within McDonald's Atlanta region, said her high rent made it nearly impossible to turn a profit at her location with the highest sales."I didn't make any money in that store for the whole time I owned that store," Daniel said.
McDonald's determines how much franchisees pay for rent using an algorithm based on how much the company spent acquiring and developing the land. According to McDonald's franchise-disclosure documents, rent varies drastically depending on many factors, including when the location was built, cost of development, and franchisees' investments. Base rent can range from zero to $210,000, and the percentage rent rate can range from zero and 42.5%, according to franchise-disclosure documents, though these figures are at the extreme limits of the range.
While McDonald's now has a fixed percentage rent for locations that opened after 2013, two franchisees and a former consultant said that black franchisees are often paying a higher percentage of sales in rent than white franchisees.McDonald's did not respond directly to franchisees' concerns that black franchisees pay higher rents on average, but emphasized that there is a standard process for setting rent at individual restaurant locations defined in its franchise-disclosure documents.
McDonald's, like most franchises, reserves the right to terminate franchisees' agreements if they fail to meet certain standards. Regional operations consultants are tasked with holding McDonald's franchisees accountable to their agreements, checking on things such as stores' cleanliness, safety, and training. According to McDonald's, these routine business reviews aim to inform organizations about where they stand and how to better their chances for growth.The former consultant who left McDonald's in 2016 said she was pressured to inspect the restaurants of black franchisees with fewer locations far more frequently than locations owned by a white franchisee who owned dozens of locations. She said some black franchisees were visited by consultants multiple times a week, while white franchisees went unvisited for years.
She says she saw black franchisees written up for minor infractions such as a broken milkshake machine. Meanwhile, she said that a white franchisee with many locations did not face repercussions for major health-safety violations, such as finding half of a dead mouse in the ice machine and sewer water flooding the restaurant.A current franchisee with stores in the former consultant's region said white franchisees with more locations regularly received preferential treatment to black franchisees with fewer locations, describing the situation as "two different worlds for the haves versus have-nots."Daniel said she felt consultants treated her more harshly than other franchisees because she was a black franchisee with only three locations.
Manning said he also saw disparities in how black franchisees and wealthier, white franchisees were treated.
"We have said for many, many years as African American operators, there's two standards. There is one for us and there's one for our general market operator," Manning said.After pushing back against McDonald's selling a store near him to a white franchisee, Manning said his locations were inspected more frequently. Instead of being visited during business hours, Manning said, consultants visited late on Friday night and once on Christmas Eve.
Manning recalled being written up for minor issues, such as a one-inch stain on a ceiling and a torn piece of wallpaper. Meanwhile, he said, many locations owned by wealthier franchisees and McDonald's corporate were allowed to continue operating without making improvements or seeing repercussions.
In Tripplett's March letter, he said the NBMOA receives calls "almost daily" from franchisees who feel they have not been treated fairly."We do not have confidence that the field levels will fairly review African American finances," the letter reads. "Until a fair process is in place the review should be done on the national level."
Chatelain says that, while becoming a McDonald's franchisee has been an incredible financial investment for many black people, these franchisees have also been forced to battle racism and exclusion for decades."From the first time an African American joined the franchisee corps in 1968 and reopened basically an abandoned store," Chatelain said, "African American franchise owners have always struggled with being in the strange position where they were highly successful business people who ... became very wealthy through the system. But they were second-class citizens within the larger McDonald's structure."
Not every black franchisee feels this way. Joyner and her husband became franchisees in the late 1980s. Joyner sold her last franchisee back to the company in 2018, though her daughter is a franchisee today."Basically, they were always good to me," Joyner told Business Insider.Joyner said she never encountered issues described by other black franchisees, instead saying that McDonald's was a family environment where she and her husband felt supported over the years.
"I've seen the company grow and I'm proud of it," Joyner added.
Dozens of black franchisees are fleeing McDonald's
In 2007, 304 of McDonald's 2,270 franchisees were black, or 13.4% of franchisees, according to the 2018 NBMOA presentation. At the end of 2017, that figure had fallen to 222 out of the chain's 1,781 franchisees in the US, or 12.5%. Business Insider could not acquire NBMOA figures since 2017, but Manning and a current franchisee said that the number of black franchisees has dropped to fewer than 200.
Shayanne Gal/Business Insider
"Over the last five years, you've had a real uptick in labor costs, and franchisees don't make as much money as they used to," Hamburger said, adding: "With technology helping it out, you have got to run more stores. So it's causing this consolidation."With 95% of locations run by franchisees, McDonald's says that the company has an economic incentive for all restaurants to succeed. As of this year, over 48% of franchisees own between one and five restaurants, according to the company.
Becoming a multi-unit operator is an expensive proposition. The company requires that prospective franchisees have liquid assets of at least $500,000 and notes on its website that people "with additional funds may be better prepared for additional or multi-restaurant opportunities."
Yutong Yuan/Business Insider
"That falls on the franchisee to be able to absorb those additional costs," Chatelain said.
"Experience of the Future" remodels could cost up to $750,000 a location, an investment that many franchisees with fewer locations and lower cash flows could not afford, even with McDonald's covering 55% of costs. With these higher costs, franchisees with one to five locations have struggled, according to three former franchisees.At the end of 2017, black franchisees owned 6.2 locations, on average, compared to the overall franchisee average of seven locations even, according to NBMOA documents. That average had increased for both groups since the end of 2012, when the average black franchisee owned 5.1 locations and the overall average was 5.3 locations.
"The reality is that most of the people who are able to leverage two stores into 12 or to 20 stores - most of them are white," Chatelain said.
Daniel, who sold her McDonald's locations in 2018, said that the remodels helped convince her she needed to leave the company. She had worked at the fast-food giant for two decades, including a decade as a franchisee."I'm one of those people you would say have ketchup in your veins," she said.
It was a harsh exit from a company that she said once felt like a family. Daniel said she felt Easterbrook, the CEO's leadership team, and the McDonald's board were increasingly focused on shareholder returns, a sentiment echoed by other franchisees."He just put a bad taste in everybody's mouth," Daniel said of Easterbrook. "He kept talking about the shareholders. It was never about the operators."
That McDonald's has forgotten about or ignored the concerns of franchisees in favor of shareholders is a common complaint from Easterbrook's time as CEO. In 2018, McDonald's franchisees formed their first independent organization, the National Owners Association, focused on protecting franchisees' interests. Today, roughly 880 of McDonald's 1,700 US franchisees are members, according to NOA documents viewed by Business Insider.McDonald's committed to paying 55% of remodeling costs when "Experience of the Future" was announced in 2017, with franchisees paying the rest. Earlier this year, McDonald's agreed to extend the deadline for redesigns, following pushback from franchisees. While many factors played into the decline in black franchisees, it did not escape franchisees' notice that the change came after Don Thompson, McDonald's first black CEO, was replaced by Easterbrook in 2015.
'We see no one that looks like us in senior management at McDonald's'
Franchisees also fear that McDonald's is losing black leadership at the top of the fast-food giant.When Thompson was CEO of McDonald's, from 2011 to 2015, the company had a significant number of black people in leadership positions at corporate headquarters and in the field, running a number of regions, according to a former high-ranking corporate employee. According to the employee, who left within the past two years, support for black executives appeared to decline with Thompson's departure.
Along with modernizing through technology, Easterbrook had worked to revamp its corporate structure around the world and the US. Easterbrook said that removing levels in the chain of management sped up the transfer of knowledge and helped McDonald's roll out innovations more quickly.
McDonald's lost a significant amount of black leadership and regional leadership more generally with the restructuring of its US field organization in 2018. McDonald's consolidated its field operations to 10 regions from 22. The company spent between $80 million and $90 million on the cost-cutting reorganization, primarily on severances and shutting field offices.Manning, who sold the last of his franchised locations in 2017, and a current franchisee said that there were nearly 50 black people in leadership positions director level and above - including in regional field offices - when Easterbrook started in 2015. That number is now in the single digits, partly because of corporate reorganization.
But three franchisees said they feel more action is needed. Tripplett also emphasized the need for "urgent progress" on the issue in his letter in March."The current state of affairs for African American Owners can only be described as hostile," Tripplett wrote. "We are very concerned that we see no one that looks like us in senior management at McDonald's."
The new CEO is already making some new hires
AP Photo/Richard Drew
"We are cautiously optimistic about some of the results we are beginning to see," Tripplett said in his NBMOA letter the day after Easterbrook's departure. Tripplett had spoken with Kempczinski the night before, as well as with Joe Erlinger, the new president of McDonald's US business who "expressed his desire to work with the NBMOA in achieving our initiatives."
The NBMOA and the independent NOA look likely to team up to address the black franchisees' concerns. Tripplett, who was elected to the NOA's board, encouraged black franchisees to join the group after Kempczinski's promotion."Much of the recent progress made for McDonald's Franchisees can be directly related to this independent trade association," Tripplett wrote in early November NBMOA letter. "If you have not done so please join now."
McDonald's declined to share specific plans to improve black franchisees' financials and address NBMOA concerns. But a source familiar with the matter said that the company is committed to attracting more operators from diverse backgrounds and fostering a diverse corporate team under Kempczinski's leadership, citing internal conversations in recent weeks.
On November 21, McDonald's internally announced the company was adding a third operations officer in field offices in Chicago, Dallas, and Nashville, according to internal documents viewed by Business Insider. All three of the new operations officers are people of color, and two are black.On Monday, McDonald's announced that Women's National Basketball Association commissioner Cathy Engelbert had been elected to the company's board. In a statement, McDonald's Chairman Enrique Hernandez Jr. said that Engelbert's election "underscores our commitment to diversity at all levels, from the crew room to the board room."
Manning acknowledges it won't be easy for McDonald's to undo decades of business that has put black franchisees at a systematic disadvantage."These things are not things that have happened just yesterday," Manning said. "These things are historical in a lot of cases. When we meet every four, five, six times a year on this issue and you meet year over year and nothing ever changes, then that becomes the definition of insanity - doing the same thing over and over and over. And you see no change or very little change."
But as a $146 billion company, if McDonald's wants to fix the problem, Manning said he believes the fast-food giant will."This lack of setting it up right from the first time is so embedded in the system, can you really get out of it?" Manning said. "And the answer is you can if you want to."If you're a McDonald's employee or franchisee with a story to share, reach out at firstname.lastname@example.org or on the Signal app at +1 646-768-4740. I'm also available via Twitter DM at @Kate_H_Taylor or on the phone at 646-768-4740 - no PR pitches, please.
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