Sharing the lessons of McDonald's

Al Dunn joined McDonald’s as a trainee manager in 1976. His subsequent career with the company lasted 30 years, including ten years as CEO in New Zealand as well as a spell at corporate HQ in Chicago and three years in Sweden as Regional Vice President and CEO. In 2007, he left McDonald’s to semi-retire to the tranquillity of Mapua, near Nelson, and to start his own business, Trumpeter Consulting.

In May 2008, Al addressed a question-and-answer session organised by Franchize Consultants (NZ) Ltd. Although the session was franchisors-only, we were privileged to attend. The following article is developed from that session, and we are sure that our readers will find Al's experiences, insights and philosophies of immense interest.

What is Trumpeter Consulting?

I set up Trumpeter Consulting to assist organisations to achieve results by focusing on business objectives and strategies, profit development, governance and competitive challenges. My role is to be a business advisor or non-executive director.

Over the last 30 years, I've been involved with a lot of businesses, Government task forces, charities, not-for-profit organisations and educational establishments. As a result, I'm used to working with people at all levels and can empathise with their needs. I like to think I'm a good listener and a good sounding board to help key managers and business owners face challenges and transform results.

The most successful strategic plans start with a clear vision of what the company wants to achieve. They then evolve into strategy and long term goals, and finally to short term goals and concrete action steps for which people are accountable. That's a good way for any business to develop, from an individual franchise right up to a major corporation like McDonald's.

Q: What do you think is the single most important thing that has contributed to the success of McDonald's in New Zealand?

A: I don't want to be trite, but it comes back to Ray Kroc's cornerstones of differentiation: Quality, Service, Cleanliness - it really is that simple. When Ray Kroc made his first visit to the McDonald brothers original outlet in 1954, the fast food industry certainly didn't have a reputation for good standards. Ray spoke to customers, to people out in the carpark, and found out what they liked. They said the outlet provided quality, fast and friendly service and was spotlessly clean. Ray Kroc translated that into a service equation which has been key to McDonald's success ever since. QSC - that's what the customer is looking for everywhere, not just in New Zealand. It's the brand trust that McDonald's tries to deliver and it's at the heart of the company's success.

Q: Which of those QSC qualities is most important?

A: It's dangerous to elevate any of them because by doing so you diminish the others. For the customer, one aspect might seem most important at any one time - eg, speed of service might be the most important thing on a drive-thru visit, but it's no use being fast if the customer drives away with a poor product. For a child's caregiver on a Sunday lunchtime, the food may be the most important thing - but if the toilets aren't clean that's a big problem. QSC means a restaurant has to offer all the qualities all the time.

Q: I've seen many McDonald's outlets exhibit unique elements to emphasise their ‘localness'. How is that managed in terms of brand standards?

A: McDonald's franchises are designed to be entrepreneurial businesses within a strong structure. That means that it's not a rigid system - there are actually a lot of different things you can do with your people, your marketing and within the local community and McDonald's encourages this. The McDonald's philosophy is that the focus on the business is hugely enhanced by the local people who work in and buy from each store. There is also an expectation that the restaurant will spend a percentage of turnover on local marketing to work in the local community.

With McDonald's, the brand standards are commonly understood by franchisees and managers. It's a family brand so you don't need to be a rocket scientist to work out what and what not to do. The local restaurant marketing manual has hundreds, if not thousands, of ideas that have been done elsewhere and that have worked well. There are so many good opportunities in any community that you don't need to stray into grey areas.

Q: Do all McDonald's management team actually work in the restaurants?

A: Yes, certainly. They need to be aware of the challenges that all franchisees and staff face and it's important that they are also seen to follow-through on issues such as cleanliness. When my daughters were in their early teens and we went to McDonald's at the weekend I'd walk around the restaurant clearing tables if necessary and they would cringe with embarrassment. In fact, sometimes they'd lecture me in the car before we went in trying to get me to promise not to do it. But all McDonald's senior staff are like that - it's your brand.

Let me tell you a story. In 1973 the man who started McDonald's in Sweden used to make a point of walking round Stockholm and visiting every restaurant regularly. On one occasion, he had a potential candidate for the marketing manager's job with him going through the final interview stage as they did the tour. The candidate stubbed out his cigarette on the ground outside one restaurant and left it there. The interview went no further.

Q: We have seen lots of menu changes in McDonald's in the last few years.

Does this reflect what the customer is looking for or is it a protective mechanism against external pressures to promote healthy eating?

A: Both! Back in the 1970s Ray Kroc was asked what McDonald's would be selling in 50 years' time. He said "I can't tell you - what I can tell you is that we'll be selling more of it than anyone else."

When I joined McDonald's there were no drive-thrus, no McCafés, no salads. But things change - you just have to keep developing new products and services as customers want them. But you do have to be careful not to get too far ahead of your customers. We trialled salads in three or four restaurants in Auckland in the late 1980s. Nobody wanted them - the idea was a dead duck back then. When we reintroduced them ten years ago, it was a very different story. So don't be too far ahead but at the same time, you have to be at the leading edge of giving customers what they want so as not to miss the opportunity when it arises.

Q: Did you get much resistance from franchisees to new ideas such as salads?

A: You have to have a proper business case for making any such changes, not just impose them from above. You have to be able to say, ‘This is the research that we've done, this is what it will achieve and this is how it works from the stand point of return on investment.' If you get people to understand why they should believe in the future of the concept then most will say OK.

Q: How are franchisees involved in the process of change?

A: Let's take McCafé as an example. That involved a significant investment because franchisees not only had to fund the equipment and décor of the McCafés themselves, but also had to redecorate their main dining rooms so that there wasn't just a flash McCafé tacked on to a tired store. We worked through every stage very carefully. We changed the company restaurants first, then we offered the same to the "pick me" franchisees. Every franchise system has people who want to test out new ideas. They are the best convertors for the other franchisees. When you have franchisees saying "This works, why wouldn't you do it? You'd be mad not to," then it's very powerful. The vast majority of franchisees will jump on board when presented with reality and the endorsement of their peers.

Q: The McDonald's franchise agreement lasts for 20 years. How do you keep franchisees motivated for that length of time?

A: There's a very strong interface between the company and its franchisees. Each business consultant (the McDonald's term for field support people) only serves 8-10 franchisees. They make regular visits, helping to develop both franchisees and staff. There is a huge amount of interaction at their restaurant level. You have got to have honesty and transparency. If things are not going well and you sense there is an issue then you have to deal with it straight away. By doing that, you help avoid franchisees falling into a comfort zone and you build on-going trust between the franchisee and the company.

It's also the case that franchisees who want to open more stores (for example, in their local area) have got to meet certain thresholds and standards, and as multi-store franchises are very desirable that helps to keep motivation high. You have to allow for the life-cycle of the franchisee - not everyone stays all 20 years, but many do and want to renew, too. McDonald's has a philosophy of re-writing franchise agreements with existing franchisees. About five years out we would start discussions about renewal. At three years out that gets more serious, with the company talking about whether it is prepared to re-write the agreement or whether it is time for the franchisee to start doing something else. In my time with the company, most franchisees who wanted a re-write were granted the opportunity.

Q: Was McCafé a New Zealand initiative?

A: Not really. The first McCafé started in Swanson Street, Melbourne in 1985. It was a response to a real estate problem in that they had a huge amount of space that they couldn't possibly fill. I think it started with something like a cappuccino machine selling coffee for a dollar and then over time they developed more products and more seating.

In New Zealand we went further to create a business within a business. This was partly a strategic decision in that we wanted to create additional credibility for McDonald's food and showcase the quality of our product. We felt that by providing a real barista and a real café within the McDonald's proposition it would generate brand credibility in the market. When I left McDonald's, the New Zealand McCafé model had become the benchmark for the world in terms of the types of locations where McCafés could be situated.

Q: What consultation processes are used in marketing?

A: These differ around the world but all share the same philosophy. All franchisees contribute on a sales-related basis to a fund that drives national marketing, and that fund is allocated by an executive committee.

In New Zealand, we had an executive committee with five franchisees elected by the franchisees. They were elected from all the franchisees, no regional or time-served quotas, on a two-year rotation basis. No matter how many restaurants you had, you only had one vote. The committee also included the McDonald's CEO and head of marketing and the company treated itself as just another franchisee with multiple stores. So there were six votes in total, only one of which vested with the company.
The monthly committee meetings were where marketing strategy was developed. We had a small marketing department, an advertising agency and a PR person who built the marketing calendar for the year. We would start work on that in June/July then go to franchisees and say, "This is what we plan and this is the money we need to do it." The franchise forum would vote for the programme with the money being based on projected volumes for the next 12 months.

Q: What are the key ingredients in a successful franchise?

A: One, there have to be clearly-defined expectations up front. Two, there have to be shared expectations between the franchisee and the franchisor of how the business will operate and what it will achieve. Get that wrong and you will have a disaster. The franchisee must trust the franchisor and believe them. The expected financial outcomes and relationship rules must be absolutely clear.

As a franchisor, you have to have empathy. You must see issues from a franchisee's perspective before determining outcomes. There must be very clear communication and it must be the right kind of communication.

What tends to happen is that the franchisor has passion and inspires others which is what causes people to join the business. As the franchise gets bigger, the franchisor spends more time in their office and franchisees slowly become maybe two or three layers away from that person. Silly stuff starts to happen in their heads - in some ways they think that this person has deserted them. At that point, the franchisor has to get on the road and spend time with them in their own environment - not at a conference with 50-100 people in the room. Going back to an earlier question, that personal contact is part of motivating people for 20 years. Access to dialogue with the boss is key.

At McDonald's, we had four formal meetings a year with over 90% of franchisees attending each time. We had a mix of formal and informal communications at those meetings; franchisees had access to one-to-one time and senior staff were always available at other times - eg, drinks before dinner. I also tried to get to each franchisee in their environment at least once a year. That had to be planned quality time, not a quick drop-in for a coffee because I was passing.

I always said to senior people, "You have to get to a point where you're doing things only you can do." From a relationship standpoint there were some things like personal meetings that only I could deliver - not because of my personality but because to them I was the senior representative of the company.

Q: Was it similar with the suppliers who grew with you?

A: All the way through. We had supplier days every year where we would share our entire business strategy with them as well as having some fun. Supplier groups are crucial - you need to recognise them for the huge contribution they make to the business and thank them for it.

Q: How does McDonald's profile suitable franchisees?

A: I'm not sure if this has changed since my time. We never actually used any psychological profiling but used a sequence of interviews instead.

The initial application would be reviewed to ensure some basic criteria were being met and then the candidate would be interviewed at a middle management level to further ascertain suitability. Interviews would also be conducted across multiple disciplines and levels as people often behave differently when they are talking to a business consultant as opposed to the CEO.

The candidate would then be scheduled to undertake a three to five day on-job evaluation. We would throw people in the deep end; choose a busy restaurant and have them working, say, Thursday during the day time then a Friday night. That's crazy and really puts the pressure on. Then they might work 11-7 on the Saturday and be in early for a Sunday opening too. During that time they would work all the stations from cooking meat to cleaning the toilets.

Working like that is quite revealing. We would actually ask all levels of people in the restaurant to complete evaluation forms because a management level person may be presented with a very different persona than a 17 year old crew trainer late at night. Is the potential franchisee as respectful of the young crew members when they don't realise they are on trial and they themselves are under pressure? If not they don't deserve to be in the business.

All these perspectives would be reviewed before the candidate's final interview with senior management. In the end it comes down to gut feel - is this person going to be a good franchisee and brand ambassador?

Q: Which are more profitable: company-owned stores or franchised stores?

A: One would always expect that a franchisee would get better results than a company employee, and normally that’s the case. Apart from the fact that they have a huge commitment to succeeding, a lot of it has to do with tenure. A franchisee who serves a specific community for 20 years has a lot of time to get to know their community, to become well-established and to grow their business.

Q: What is the best piece of advice you have ever been given?

A: If you ever find yourself not wanting to go to work, go and do something else.

The success of a franchise is dependent on the success of the franchisees. Assuming you’ve got the structure correct and the franchisees are happy their success is the cornerstone of the franchise. I always used to say to our business consultants, ‘If you ever feel jealous of one of your franchisees because they’ve got a new house or a new car or a new boat, come and see me because we need to change the job that you’re in. We should be celebrating the success of our franchisees because that’s our business.'

Q: What was the toughest decision you ever made?

A: There’s no one decision that stands out, but the toughest types of decisions are all to do with people. Some people can be loyal, hard-working and passionate but they reach a point where the job has just grown beyond them. They’re not getting the strategy and the future direction of the company. McDonald’s always has great respect for its people and will bend over backwards to help them achieve. You can exhaust yourself doing that but the time sometimes comes when the right decision is to say, ‘I’m sorry, but…’ This applies to staff, to franchisees and suppliers. Those are the hardest types of decision.

Q: How do you encourage family involvement in the franchise?

A: McDonald’s strongly encourages both partners to work in the business at whatever level is appropriate, and that goes for children as well. Employing children in the business is not an issue if properly managed.

We had franchisees who wanted their children to take over as the next generation franchisee after, say, 15 years. That’s desirable, but we would often want the children to do something else for a while so they have some perspective on the business. There are lots of examples of this in the US and in New Zealand there was increasing interest prior to my departure. It’s understandable – if you have a child who has been brought up in the business, understands its values, its standards and its history, who else would you want to sell it to? That’s assuming the candidate has the necessary competencies, of course.

Q: What was the biggest challenge you had to overcome?

A: The biggest challenges are always the distractions that take your attention away from the core business, for example, the Supersize Me film. If you eat 5,000 calories a day, of course you’re going to get fat! You have to deal with such distractions, but you also have to make sure that the only people involved are the ones who need to deal with it – you have to keep the others focused on running the business. In the case of that movie, we had to say to franchisees, 'Here is the information that you need to deal with the issues on a local basis but don’t worry, we will handle all peripheral activity.'

Q: What part do toys play in marketing?

A: The core of the McDonald’s business is family, so having things like playlands, special menu items for kids and toys as part of the Happy Meal was an integral part of our appeal to families.
When I was working in Sweden a high profile issue was to introduce toys that were educational, longer-lasting and more activity-oriented rather than just a plastic thing that squeaked. We responded with things like bat-and-ball sets and books. There’s a challenge in that, but real value.

Q: What sort of ongoing interaction do McDonald's franchisees have with the company?

A: Each franchisee is assigned a business consultant who works with the franchisee to assist with all aspects of the business’s needs. They work on issues relevant to improving Quality, Service and Cleanliness and help the franchisee audit things like people practices and health and safety and hygiene. They work on these activities throughout each year helping to ensure the business is running well, that the best people practices are being employed and that the right type of training is being undertaken across all levels in the restaurant.

Franchisees are encouraged to use the expertise of the consultants, all of whom have run restaurants themselves. There’s a lot of benchmarking with restaurants of similar size and type to assist with managing the P & L on a monthly basis. In addition we used to have a formal business meeting every 18 months which would also involve discussions around the balance sheet and the overall health of the business.

Q: When a franchisee comes into the system, what restrictions are there on selling?

A: They must sell to an approved purchaser – someone with the correct level of qualifications. They must have been through the 12 months of franchisee training and have been certified as having completed the management training process. Often, the purchaser will be an existing franchisee looking to expand.

We also try to create opportunities for upper and middle management employees of good standing from within McDonald’s. Often they have been with us for 15-20 years already.

Q: Does the individual or their company sign the franchise agreement?

A: In my day it was either, but if it was a company then the chosen individual had to have a minimum of 51% so that they had jurisdiction over the business. Only one person was ever the franchisee – we didn’t want the business to get caught up in marital property disputes. For example, if there needed to be a restaurant remodel we had to know we could deal with the franchisee in any particular situation without it being compromised by external issues.

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