New McDonald’s CEO Faces Resistance from Franchisees

November 6, 2019, 1:17 PM UTC

Ray Kroc, the mastermind behind McDonald’s ascension to the throne as the world’s fast food giant, liked to describe the company as a “three-legged stool.” Its success, he said, was dependent on the equilibrium of three different parties: suppliers, employees, and franchisees. 

The announcement earlier this week that Chris Kempczinski would become the new CEO of McDonald’s risks sending that fragile balance out of whack. Franchisee unrest has been on the rise at McDonald’s, and Kempczinski, who previously ran the U.S. business, has been among the players at the center of the growing conflict.

Kempczinski’s appointment to the top job on Sunday came after then-CEO Steve Easterbrook was ousted over a consensual relationship with an employee—a violation of corporate policy.

McDonald’s declined to comment for this story beyond pointing Fortune to a previously released statement from its chairman of the board, Enrique Hernandez Jr., which in part stressed Kempczinski’s experience running the U.S. business, “where franchisees are delivering strong financial and operational results.”

Easterbrook, a Brit who had worked at other restaurant chains, represented a significant departure from McDonald’s past CEOs, who mostly grew up in the U.S. stores and worked their way through the system; he did, however, spend nearly 20 years in McDonald’s U.K. and European business.

Kempczinski has been with McDonald’s for four years—a rookie by the company’s standards. He had previous stints at PepsiCo and Kraft before being brought on by Easterbrook as part of an initiative to inject fresh blood into McDonald’s insular culture.

Kempczinski’s relative newness to the brand has not always resonated with store operators. Some franchisees who had been around for 30 or 40 years bristled at being told what to do by someone with only a few years of experience at the company, explains Richard Adams, who runs franchisee consulting firm Franchise Equity Group. Says industry analyst Howard Penney of Hedgeye Risk, “The saying is ‘ketchup in your veins,’ and he doesn’t have it.”

The McDonald’s board elevated Easterbrook to CEO in 2015 with a mandate of reigniting the company after a run of declining sales. His efforts to modernize the brand paid off, as sales returned to growth and the stock nearly doubled on his watch.

But traffic has waned in recent quarters, leading franchisees to voice concerns that the money they were being asked to invest in their stores for initiatives like remodels, self-serve kiosks, fresh beef, delivery, and all-day breakfast were not paying off. Kempczinski, as head of the U.S. business, was a key architect in the plan and the one delivering the directive.

“There’s a natural friction when asking franchisees to put up a lot of capital for technology initiatives that are not proven,” says Morningstar analyst R.J. Hottovy. Says Bernstein analyst Sara Senatore, “The company has been forthright about the fact that operators felt like they were being asked to do a lot in a short amount of time.”

But that friction reached a new level late last year when some 400 franchisees decided to create an independent franchise group for the first time in the company’s history, in order to push management to take their concerns seriously. When the group, the National Owners Association (NOA), met for the second time in December, more than 1,200, people were in attendance. The chairman of the organization, Blake Casper, did not respond to requests for comment.

“McDonald’s can set the direction of the brand, but you need the franchisees to buy into it,” says Senatore. “Franchisee alignment is so important to these systems.”

According to a memo obtained by Business Insider, McDonald’s official franchise group, the National Franchisee Leadership Alliance, is so far supportive of the new leadership team. Several members of the NFLA’s executive team did not respond to a request for comment.

Reggie Webb, the chair of McDonald’s franchisee international leadership council and a member of the NOA, acknowledges there was a learning curve when Kempczinski took over the U.S. business. “It’s a huge system and very complex,” says Webb. “Any mistakes or errors he made, he was quick to learn from and quick to correct.” Webb, a 35-year franchisee in Los Angeles, says the NOA was instrumental in getting headquarters to listen to franchisee concerns, and that “unity is as strong as its ever been today” and that sales and cash flow are growing.

But Kempczinski is still likely to face a contingent questioning his leadership and credentials. Recent comments posted on the message board of consultancy Franchise Equity Group give a taste of the reaction from some operators: The board of directors “should know better than to promote Chris K,” read one posting. “He doesn’t have the experience to run the global operation.” Read another, “Very anti-operator.”

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