Within the last six months, two mainstays of the Top 100 Global Franchises ranking made a play to become even bigger on the international food franchising stage.
In late August 2014 word started circulating that Burger King and Tim Hortons (#22) were discussing a merger. Less than 24 hours after official reports were released, an agreement was reached for an $11.4 billion buyout, with Burger King acquiring Tim Hortons. The agreement made the newly-formed company an instant mega fast food empire with over 18,000 units worldwide. The deal cleared inspection by Canadian anti-trust regulators in October and was made official in December. The newly-formed entity was named Restaurant Brands International, complete with the appropriate stock symbol of QSR.
Graphic Credit: USA Today
The merger was a truly international affair. Not only did the deal combine an American burger restaurant and a Canadian coffee chain, it was spearheaded by Brazilian investment firm 3G Capital, which is the majority owner of Burger King. The deal was also completed with key assistance from American billionaire Warren Buffett.
But why the business move? Burgers and coffee don’t seem like a natural combination. The main reason stated by the principals of the transaction was a desire from both parties to expand their reach around the globe. “Tim Hortons should very clearly be a global brand,” the company’s chief executive Marc Caira said at the time of the merger’s announcement. “With Burger King and 3G, I can definitely get there faster.” Another reason is both parties’ desire to serve customers from breakfast to dinner.
While the merger certainly increases their respective international profiles in the food franchising world, the move also drew the ire of many that viewed the merger as a corporate tax inversion deal. Tax inversion deals, and the subsequent moving of corporate operations out of the United States, are one way companies avoid paying higher taxes. In this case, the decision was made that the combined company would be based in Canada subjecting it to Canadian tax laws instead of those of the United States.
Officials on both sides quickly moved to quell the dissention by pointing out the franchise systems’ individual operations will remain exactly where they were. Tim Hortons is still being run out of its home base in Oakville, Ontario. Burger King is still operated from Miami, Florida. Furthermore, in addressing the concerns that Burger King was motivated to complete the deal to get a tax break, company CEO Daniel Schwartz stressed that Burger King’s tax rate would remain about the same even after the deal closed.
Another question many have is how did the deal come together with most business observers unaware until it was nearly completed? According to the New York Times, executives and bankers from three organizations: Lazard, the Royal Bank of Canada, and Citigroup worked quietly for several months on the deal using code names for the companies: “Blue” for Burger King and “Red” for Tim Hortons. What’s more, representatives and advisers for the companies didn’t negotiate in one primary location. Instead, they travelled between Ontario, Canada; New York City, and additional cities over the time period.
As stated above, management is keeping corporate business operations of both companies separate, but does this merger mean you’ll now be able to get a Timmie’s Mocha Latte along with your Whopper? No. Well, not yet at least. According to Schwartz, “There's no plan to mix the products or do co-branding.”
McDonald’s Hits a Rough Patch
In October 2014, McDonald’s announced a sales drop of 1%. Not a lot, but the drop marked a 12 month period without sales growth in the U.S. for the burger chain. The slide continued through the end of the year and into 2015.
McDonald’s Same Store Sales over 5 Years (Graphic Credit: Business Insider)
Much of the decline is attributed to a lack of Millennial customers. In the last three years, visits to McDonald’s by people between 19 and 21 years old have fallen by 13%, according to Technomic. Studies are showing this age group is turning towards brands that have positioned themselves as trendier and healthier than the Golden Arches.
To re-establish positive momentum, McDonald’s is rolling out a comprehensive plan that will “enhance its market, simplify the menu, and implement a more locally-driven organizational structure to increase relevance with consumers.” McDonald's CEO Don Thompson says the changes will “better highlight customers’ favorites and make the experience faster and easier for our customers and our crew.”
Why would a franchise known for fast service be worried about its speed? Over the last few years, McDonald's menu has grown by 70%. The increase in menu items has led to complaints that the traditional “speed of McDonald's” has been slowing down noticeably and affecting customer and employee satisfaction.
The company notes that the paring down of menu items won’t mean decreasing options for customers. In fact, it’s the opposite. McDonald’s has been experimenting with letting customers customize their burgers. The “Create Your Taste” program gives customers the option to use tablet-like kiosks instead of ordering at the counter to choose their own toppings—and even the type of bun used. A similar program has already seen success in Australia.
The U.S. trial started with four locations in California, and is expected to expand to 2,000 locations in California, Illinois, Wisconsin, Georgia, Missouri and Pennsylvania throughout 2015. The company is also offering additional breakfast sandwich options to customers in certain locations, including egg whites and white cheddar substitutes.
The company is also giving customers the transparency they’ve been clamoring for. The “Our food. Your questions.” campaign is designed to combat the negative stereotypes attached to McDonald's and put fears to rest.
Thompson won’t be around to witness the effect of these changes though due to his impending retirement. An announcement in January over two years after having ascended to the position of CEO in July 2012 signaled Thompson’s retirement to come on March 1, 2015 with longtime McDonald’s executive Steve Easterbrook taking his place. Easterbrook, originally from Great Britain, has been with the fast food chain since 1993 and most recently served as McDonald’s chief brand officer. Analysts are bullish on the change citing Easterbrook’s work on McDonald’s recent marketing, digital, and menu overhauls.
The Legal Status of Franchising
The biggest challenges McDonald’s has been facing recently don’t just include having to revamp brand perception and tackle lagging sales. Unions have been a major challenge to the franchise system over the last few years as well.
Between 2012 and 2014, unionized McDonald’s workers filed over 180 complaints to the National Labor Relations Board (NLRB). The complaints covered a number of working conditions deemed unacceptable by employees. The disagreement came to a head in July 2014 when the top prosecutor for the NLRB rejected the claim of McDonald’s corporate as having no liability for the management conditions of workers in franchised outlets.
In other words, the ruling means that McDonald’s corporate could be held as a defendant to the 43 complaints and regarded as a joint employer alongside the franchisees that run each restaurant. And while the ruling is a blow, many franchise industry observers are anxiously awaiting a decision on the Browning-Ferris case, which should be announced early this year.
The unrelated Browning-Ferris case between a waste services company and a staffing agency was already in progress when the McDonald’s case made its way to the courts. The significance of the case goes beyond any one industry and will potentially have a major impact on the way franchises do business.
The NLRB indicated in the Browning-Ferris proceedings that it is willing to move away from decades of precedent and take a broader view of whether two companies qualify as joint employers. According to Robert Cresanti, EVP of Government Relations & Public Policy for the IFA, the NLRB “is likely to adopt the General Counsel's position that any employer who utilizes a franchise model, independent contractor, subcontractor or supplier network, will be liable for the employees of those businesses with whom it does business.”
Thus if this change in liability structure is applied to the franchise business model, the relationship between franchisors and franchisees may move into uncharted territory, affecting the level of independence that franchisees enjoy while working within their respective franchise systems. If the General Counsel’s position is upheld in the final board ruling on the case, franchisors may have to take a more active role in franchisee operations to thwart potential legal issues.
For more information on how these rulings could impact the franchise model, please see our feature with franchise industry expert Paul Segreto, CFE.