by Simon Lord
last updated 25/05/2013
McDonald's - The Myth & The Magic
by Simon Lord
last updated 25/05/2013
This article is from our archive and first appeared in June 1998. For more recent articles on McDonald's, see Re-Inventing McDonald's (Sept 2009), McDonald's not looking for multi-millionaires (Sept 2009) and Sharing the Lessons of McDonald's (June 2008). For Georgie Pie in New Zealand, see Georgie Pie to trial in McDonald's outlets after 15 years (May 2013)
When you are involved in franchising, McDonald's is probably the name that comes up more than any other. People explain franchising in terms of McDonald's, or outline their aspirations in terms of 'being like McDonald's' or 'not like McDonald's'. But for all that, there is probably more ignorance, myth and rumour about how this franchise works about than about any other. How does it really work, and what is it that makes McDonald's so successful?
McDonald's in NZ
McDonald's was brought to New Zealand in 1974 by Shop Rite supermarket founder Wally Morris. One of the companies he beat in the race for the franchise rights was Progressive Enterprises, founders of the ill-fated Georgie Pie chain. The differing fates of the two brands only serves to emphasise the effectiveness of the McDonald's system.
The first McDonald's opened in Porirua in 1976, and was an instant success. After some initial 'joint venture' operations, the company started franchising in earnest here in 1985. Initially it was estimated that the New Zealand market might support 50 stores, but there are now 144 restaurants, of which 106 are franchised and the remainder company-owned. Is this evidence of an insatiable hunger for Big Macs on the part of the NZ public, or an insatiable appetite on the part of the franchisor? Jenny Gilbert is the Vice President and Chief Operating Officer for McDonald's System of New Zealand.
'I don't think that anybody back then really knew how many restaurants would be realistic,' says Jenny, who began her own career with the company as an after-school part-time crew member in 1979. 'Our first stores restaurants were big, with 250-350 seats. We probably would have projected 50 stores as an ambitious figure back then.
'But over the years we have developed a number of different restaurant types which have enabled us to go where people want us to be. We started going into food courts at Lynn Mall about eight years ago, and that was a huge risk at the time but proved to be highly successful. We've added drive-thru restaurants and caf�-style outlets, and we've gone into institutions like Starship Hospital and the AIT.
'Technology has changed and we've got smarter. Going into food courts taught us a lot about operating in smaller units, and new ideas both at home and overseas have refined our operating systems. A new free-standing restaurant would be only about 70-90 seats now.'
The drawing power of those golden arches has also made new sites viable. McDonald's is working with several oil companies to develop more sites like that at Wellsford in Northland, where the local Caltex station is coupled with both McDonald's and Long John Silver franchises (operated by different franchisees). 'The population of Wellsford is only about 1700 people, but the passing trade on State Highway 1 makes it viable to have an outlet there,' says Jenny. And, contrary to rumour, the company has not stopped opening new restaurants. We opened 18 in 1997, which was a very busy time for us,' admits Jenny. 'I think we'll probably be opening another 12 a year for the next three years at least.'
There is a much-vaunted rumour that the McDonald's franchise in Browns Bay, Auckland, is the only one in the world ever to have failed. Is this true? 'No,' says Jenny Gilbert. 'It's part of repositioning and relocating as the market changes. We've just closed Otahuhu because we had the opportunity to move to a new store where we could fit in a drive-thru.
'In the case of Browns Bay, McDonald's simply selected the wrong site. It closed 16 years ago, and you could say it was ahead of its time – if seagulls ate hamburgers we'd have been in great shape. I wish we had it now, but back then the area didn't have the population base for a site without a drive-through or a playground. We helped the franchisee into another location, and he stayed in the system for a long time – in fact, he bought two more restaurants before selling up and retiring.'
Buying a franchise
The continuing programme of openings means there are still opportunities for growth for the select band of McDonald's franchisees in New Zealand. However, the company has changed since founder Ray Kroc used to sell franchises to people he met in the golf club – today it is renowned for having possibly the most rigorous franchisee selection procedure in the world and it is perhaps this process more than any other that makes the company as successful as it is.
Although the initial screening procedures are extremely thorough, would-be franchisees are not granted a franchise until after they have been through a minimum of 12 months of full-time training. This lengthy process ensures the commitment of the franchisees and enables the company to ensure that the people it selects are familiar not just with the mechanics of the business but also the whole McDonald's philosophy.
'We have a variety of training programmes,' says Jenny Gilbert. 'Our crew training includes things like food safety and preparation, customer experience and so on. Then there is our restaurant manager programme, which covers three different levels and usually takes between two and five years to complete. New franchisees have a programme designed to achieve all of those courses in their 12 months.
'In addition, they do an advanced operations course either in Australia or at Oak Brook (the famous 'Hamburger University' in Illinois). Many choose to go to Oak Brook just for the experience.'
The training ranges from the technical management of operations such as cleaning, crew management and floor control, to broader management topics such as counselling, recruitment, staff retention, profitability, marketing, situation control and customer satisfaction measurement. 'The management skills are universal, but they are tailored throughout to how best to run a McDonald's restaurant.'
Much of the training also takes place in franchised restaurants. 'Rather than use company stores, we try to match people up with franchisees who operate similar types of restaurant in similar towns,' explains Jacqui Pratt, Financial Controller of Franchising and Legal for McDonald's.
There are 'verification steps' right the way through the training programme. 'You don't pass on to the next level until you can prove you've got the skills,' says Jacqui. 'You are being constantly evaluated in the restaurant, not just by corporate staff, but by the franchisee, the managers and the crew.'
The crew? 'When a franchisee is doing his or her on-job experience, crew members have a sheet asking how the franchisee reacts under pressure, how quickly they learn, what their communication skills are like, how they respond to people. The amount of teamwork required to make a restaurant run smoothly is amazing – nobody does any one thing from start to finish and communication is vital. It's quite instructive to see how people cope.'
Although the would-be franchisee does not pay for any of this training, they are not paid either – 12 month's time is part of the investment. Nor are applicants guaranteed a franchise until they have completed the course. Jenny Gilbert says 'Continuous feedback is given throughout the training programme, and a franchisee understands our expectations of the skills they need to master before a franchise can be granted.'
The new franchisee is now trained, steeped in the McDonald's culture, and ready to go. How much money will they need to proceed?
The franchise fee is NZ$50,000 +GST. In addition, there is a $25,000 deposit, which is refundable upon leaving the system. However, the franchisee must also fund the cost of recruiting and training their crew, and fitting-out the property according to McDonald's requirements. 'A 70-seat free-standing restaurant would cost about $700,000 to put together,' says Jenny Gilbert.
McDonald's always either takes the head lease or owns the property outright, making it one of the largest property-owners in the world. This is the legacy of Harry Sonneborn, McDonald's original financial manager, who realised in 1956 that the royalties charged by McDonald's were not sufficient to fund the services required by Ray Kroc – let alone provide a profit for the company. Sonneborn saw the other advantage of this approach as being the added control it gave over franchisees in the early days.
To this day, McDonald's franchisees pay rental to the franchisor. This rental is calculated either as a base fee or a percentage of turnover, or a combination of both. 'Our philosophy is to provide a fair return for franchisor and franchisee,' says Jacqui Pratt. 'We go over the figures with all our franchisees so they know how much we will make and how much they will make.' She will not be drawn on figures because they vary from site to site, but one franchisee reports that their rent works out at 12% of gross sales.
In addition, there is a service fee of 4% of gross sales, and a marketing contribution which varies slightly from year to year. McDonald's are understandably reluctant to confirm this figure, but it is believed to be around 5% - double the average level, according to the 1997 Countrywide Bank Survey of Franchising. The franchise agreement also requires a minimum of 1% of turnover to be spent on local marketing, 'but every franchisee would exceed that,' says Jenny. 'It's not something we even check up on.'
The standard franchise term is 20 years, although this is pegged to the term of the lease – for example, in food courts, the term is likely to be much shorter.
Operating the franchise
Even a single McDonald's restaurant is big business. McDonald's will not discuss operational figures, but one franchisee said publicly last year that their smaller store-front outlet needs to turn over $1 million to break even, and between $1.1 and $1.5 million to provide a reasonable return on investment. To achieve this, a gross profit of 66% is required.
There are 55 franchisees in New Zealand. About half own just one restaurant, while the other half have capitalised on the investment made in their training by owning anywhere between two and six restaurants.
In order to be granted a second McDonald's, owners have to demonstrate not just that they are running their first store to an acceptably high standard, but also that they have a record of commitment to the development and growth of the system beyond their own store.
McDonald's does not grant franchisees exclusive territories, which became a bone of contention in the US when some franchisees felt that the company was saturating the market with new stores to the detriment of existing sites.
Has the same problem arisen in New Zealand? Ray Stonelake owns five restaurants in West Auckland. 'Territories have been a significant issue in every significant market over the past five years, but the New Zealand management have handled it very well,' he says. 'There might be some short-term pain sometimes, but they have gone out of their way to ensure the franchisees' long-term interests aren't damaged.'
The franchise relationship
It is impossible to understand the success of the McDonald's franchise system without understanding the importance above all else of the corporate culture. The McDonald's philosophy is to select people capable not only of managing the operation but also of espousing whole-heartedly the goals and values of the corporation.
Ray Stonelake says, 'Nothing will prepare you for the intensity of the relationship which you build with McDonald's. The long process of training is as much about becoming part of the culture as it is about learning things. You can pick up the ideas quickly enough, but experiencing them takes time and commitment. We talk about having ketchup in our veins – that's the glue that holds it all together.'
The result of this culture is, at its best, a sharing of philosophy and goals which makes the ongoing management of the business more participative than in many franchises. For example, the six-person marketing group consists of five elected franchisees and one corporate representative, each with one vote. The advertising agency and the marketing department work on the ideas that form each year's marketing plan and make regional presentations to get feedback from franchisees. The marketing group agree on the plan and on what budget will be required for the year, and then the whole franchise gets to vote on the proposed marketing levy.
'It works because we all share the same culture and the same understanding of our business,' says Jacqui Pratt. And as Douglas Faudet, CEO of McDonald's advertising agency DDB, says, 'If the majority of the franchisees think that something isn't a good idea, they're probably right.'
'Our philosophy is to give people a clear understanding upfront of what we expect from them, and what they can expect from us,' says Jenny Gilbert. 'We have some of the tightest procedures and operating systems in the world, but within those there is so much scope for individual initiative – the important thing is that people exercise that initiative within the culture of the business, and then share it with the others.
'For example, we don't police local advertising. Our franchisees know the importance of representing the brand consistently, and they have a manual showing how the trademark must be used, but we don't have anyone saying "yes, you can do this" or "no, you can't do that." Franchisees know what is appropriate.'
'The whole business is hugely participative. If someone is not participating or performing well, there is a certain amount of peer pressure brought to bear by the other franchisees often before we need to say anything. The franchise agreement stays in a cupboard, and I can't think of a case where we've ever had to get it out. We have never terminated a franchisee in New Zealand – the only reason anyone has ever left is because they have wanted to move on or retire.'
But the agreement itself is apparently very, very tough. Lack of a dispute resolution clause means McDonald's would not qualify for membership of the Franchise Association of New Zealand, 'although we always aim to find an amicable solution to any problem,' says Jacqui Pratt. 'Our intention is to find a fair way of doing anything before we do it – not after.'
The sheer size and dominance of McDonald's has seen it elected as the global villain of choice for many people. Anti-McDonald's feeling was crystallised by the infamous McLibel case, when the company sued protestors in the UK in what turned out to be that country's longest ever libel case.
The case, which McDonald's won, was undoubtedly a public relations disaster for the company. In summing up the judge found that although the company had been defamed in several areas, the corporation paid low wages, exploited children in its advertising, and through its suppliers was 'culpably responsible' for cruelty to animals in the UK. Has the judgement had any impact in New Zealand? Ray Stonelake says it has not impacted upon his business at all. 'It was clearly a British issue. I speak at lots of functions, and I cannot recall a single question coming up about it.'
Jenny Gilbert agrees that it is not a local issue. 'McDonald's in New Zealand has never paid youth rates. Our starting base rate is $8.41 (double the NZ minimum wage for people under 20), and the average rate for crew members is over $10. Franchisees have the flexibility to pay more, and I've never known of an instance where they pay less.'
And Douglas Faudet addresses the issue of exploiting children. '70% of our customers are families, so of course children are part of our culture – the restaurants are built for them. But the franchisees are family men and women too. Not once in 11 years have I heard anyone say 'how can we get the kids to pester their parents into coming more often?'
'I think our approach is typified by the way we use Ronald McDonald. He never appears on TV in a commercial situation – he's not used to sell product.'
Local attention centres more on issues like the opening of the new McDonald's within the Starship Children's Hospital. 'We got stick from some of the media, but not from our customers,' recalls Jenny Gilbert. 'Talkback was full of people speaking out in favour, and subsequently the restaurant has fulfilled a real need for the people using the Starship Hospital.'
McDonald's mantra of QSC&V – Quality, Service, Cleanliness & Value – has passed into franchising folklore, and Jenny Gilbert regards helping people achieve the standards as a major part of her role.
'Our field service department has nine consultants who handle franchisee relationships. They are there to work alongside franchisees as a conduit for the sharing of ideas as much as anything. We have a programme of graded visits, some announced and some unannounced, and they will monitor QSC&V standards. More than anything, we're looking to provide constructive feedback. You can walk into any restaurant at any time and find something wrong – that's inevitable with the size of the business and the hours we're open – so what we're really looking for are trends which show we're satisfying our customers or suggest that performance might be dropping off in a particular area.'
Every restaurant will receive at least one visit a month, and franchisees can request more. But as Ray Stonelake says, 'It seems as if I have someone in every day. Business planning, marketing, someone checking temperatures or training – we see lots of people.'
The company used to use a national 'mystery shopper' scheme to provide system-wide customer feedback, but this was scrapped three years ago. 'We felt it would be more effective if franchisees organised the feedback themselves,' says Jenny. 'Most use mystery shoppers or carry out some form of survey, and now they receive the reports direct the onus is on them to make any necessary changes.'
In a business renowned for its standards and consistency, trusting the franchisees to measure their own customer satisfaction levels is perhaps the ultimate example of the corporate culture at work.
For an outsider, that corporate culture is difficult to imagine, almost impossible to emulate. Its foundation lies in the first twelve months of training when, as Ray Stonelake says, 'you either get it or you get out.'
Ray is the epitome of the McDonald's franchisee. Hard-working, charismatic, confident and very successful, he is still devoted above all else to maintaining the corporate culture – his culture. 'I spent seven hours yesterday in one of my stores examining everything, every corner, every piece of equipment. Some people think I'm a little loopy still to be doing that 20 years on, but if you want to stay ahead of the game that's what you've got to do,' he says.
And he finishes by quoting Ray Kroc, the man who started it all: 'We will always be the best because we pay more attention to the details of this business than anyone else.'
- In 1996, McDonald's overtook Coca-Cola as the best-known brand in the world.
- The Golden Arches are recognised by more people world-wide than the Christian cross.
- There are currently 23,346 McDonald's restaurants in 110 countries world-wide.
- One new McDonald's opens somewhere in the world every six hours.
- In 1997, systemwide sales were US$33,638 million.
- The McDonald's corporation has taken over from the US Army as the western world's largest staff trainer.
- In the US, there is one McDonald's for every 22,000 people. Outside the US, the figure is one per 605,000 people.
- 70% of new restaurant openings are outside the US
This article is from our archive and first appeared in June 1998. For more recent articles on McDonald's, see Re-Inventing McDonald's (Sept 2009), McDonald's not looking for multi-millionaires (Sept 2009) and Sharing the Lessons of McDonald's (June 2008)