McDonald's (MCD -0.88%) has so far proven it's inflation-proof. According to Placer.ai data, traffic was up nearly 18% the first week of June, when gas prices surpassed $5, for instance.
Additionally, restaurant analyst Peter Saleh from BTIG recently noted same-store sales improvement throughout the quarter despite a challenging consumer environment. He cites consumers' familiarity and trust with the brand as they manage inflationary pressures not seen in 40 years.
But the global quick-service giant may have bigger issues lurking than a softening consumer. Let's take a closer look.
Franchisees move to retain more control
Tensions between corporate and franchisees seem to be growing, as evidenced by a recent no-confidence vote on CEO Chris Kempczinski from the National Black McDonald's Operators Association, as well as strong franchisee pushback on the chain's new operations performance grading system.
Such friction isn't necessarily new within McDonald's, but it has been accelerating in recent years. In 2018, the National Owner's Association was formed by over 400 franchisees to retain more local control on pricing and to advocate for their best interests. At the time, operators perceived there to be too much discounting from corporate, which was hurting their profits.
McDonald's has since navigated squabbles with franchisees over everything from tech fees to remodel costs, but it has reached a compromise each time. After pushback from franchisees in 2018, the company slowed down its remodeling program, for instance. And after several franchisees publicly stated they were caught off guard by the addition of tech fees in late 2020, McDonald's announced it was cutting those fees by over 60%.
Image source: Getty Images.
Still, claims of opacity have lingered despite promises by the company to provide "greater transparency and visibility into our system."
The latest strain comes from an announcement by McDonald's of Operations PACE, a new performance management system that most franchisees say is not an accurate reflection of the day-to-day business. Some franchisees also believe the new system is demoralizing for employees at a time when labor is hard to come by.
Long-term implications
Perhaps surprisingly, these tensions come as the company's operators have experienced record cash flow in recent quarters. So in the near term, the U.S. business should remain strong as inflation lingers.
However, friction with franchisees can compromise the entire system's strength, as has been proven before in other chains, such as Quiznos and Krispy Kreme. In the past year, a record 400 franchisees have left the 95% franchised system, despite strong sales and cash flows, indicating a crack in the company's foundation.
Franchisees are one-third of what founder Ray Kroc called the three-legged stool, along with suppliers and employees. If those franchisees aren't on the same page as corporate, that stool becomes unbalanced, which could affect the company's performance in the long term.
