Big Lessons From The Big Country

Callum Floyd rode across the USA to bring back insights from the International Franchise Association convention in Las Vegas

In late February, I travelled to the USA to attend the annual International Franchise Association Convention. Post-Covid, I was keen to compare New Zealand franchising company and sector challenges, priorities and learnings with those from the largest franchise companies in the world. While there, as an ex-Chair I also represented the Franchise Association of New Zealand at a meeting of the World Franchise Council.

The US lays claim to being the home of modern-day franchising. While franchising has European roots involving royalty, land rights, exploration and trade, it is the USA that first combined the franchise concept with industrialisation and increasing mobility to create automobile giants such as General Motors and Ford, fuel station chains including Gulf and Texaco, food and beverage brands like Coca-Cola and KFC, the accommodation networks of Howard Johnson, Marriott and Hilton, and many other now-global brands.

In my mind, any journey to the heart of franchising needs to involve McDonald’s. Founded as McDonald’s Bar-B-Q in 1940 – decades after some of the earliest US franchises – McDonald’s Corporation today is a US$211 billion company with restaurants in more than 100 countries. 35 percent of those restaurants are located throughout the United States.

The oldest McDonald’s

I therefore started my journey with a pilgrimage to Downey, California, to visit the oldest surviving McDonald’s restaurant – first established in 1953. It was (arguably) restaurant #3, and just the second restaurant franchised by the original McDonald brothers. I was keen to see something of franchising and branding from yesteryear.

This particular restaurant is very different from the other 38,000 McDonald’s around the world. The reason is that it pre-dates Ray Kroc and what is now known as the McDonald’s Corporation. While Kroc is often cited as the founder of McDonald’s, he only purchased the rights to grow and franchise McDonald’s in 1955. It was brothers Richard and Maurice McDonald who founded the company, and they were already franchising prior to Kroc’s interest.

This Downey restaurant didn’t fall within Ray Kroc’s control in the original deal he’d struck with the McDonald brothers, which led to years of frustrations for Kroc and his team before they acquired exclusive rights to the name in 1961. It was a lesson to future generations of franchisors on the need to have authority over the total brand and all units.

While Kroc’s team continued to evolve the brand with a clear vision and unrelenting commitment to operational improvements, the Downey unit remained stuck in time. It resisted all of the latest construction, signage, operating and product elements (including the Big Mac) – and there was nothing Kroc could do about it.

The third-ever McDonald’s restaurant in Downey, California

McDonald’s Corporation eventually purchased the restaurant in 1990 intending to demolish it. However, local activism resulted in an historic preservation order, meaning it had to be saved. Today, the restaurant continues to operate and has a small museum adjacent containing a few little treasures including old advertising posters, franchise and training manuals, and a Multimixer – the milk shake machine that attracted Ray Kroc to investigate McDonald’s in the first place.

The restaurant is also unique in that it retains the historic signage with the original McDonald’s font and the ‘Speedee’ mascot, later replaced by Ronald McDonald. The original dramatic design also demonstrates the origin of the famous Golden Arches.

Seeing this restaurant, with all the history it encapsulates, served as a good introduction to the International Franchise Convention where McDonald’s CEO & President Chris Kempczinski would be the keynote speaker.

Getting into the zone

Before attending the Convention, I had some centring to do – which I did with the help of five days and an 1868cc Harley Davidson Road Glide. I was keen to get more of a feel for the country, people and culture. Nearly 3,000kms later I’d taken in Death Valley, old towns of Oatman, Kingman and Seligman on Route 66, and Tombstone, Bisbee and then Naco, Arizona, on the border with Mexico.

Along the way, I’d checked out a good range of well-known and wellworn chain names like Howard Johnsons, Motel 6, Chevron, Terribles, McDonald’s, Taco Bell, Chipotle Mexican Grill, Dollar Tree, Walmart, Whole Foods, etc – to mention but a few.

I gained a greater appreciation for some of the challenges and cultural differences: America is a big country with a lot of open space, big roads and relatively free (and in some places challenging) living. Big cars and some big guns (at times) were on display. Throughout it all, though, I experienced incredible friendliness and great commitment to the customer – and while some of the buildings might have been ageing, the personal interactions were alive, interesting and positive. Gas station toilets were always clean, had soap and fresh paper towels. And even the State Trooper I met after a misunderstanding (on my part) of speed limits was positive, which was lucky because at that point I’d only just started the trip.

The 2023 IFA Convention, Las Vegas

The IFA Convention was held across three days and had over 3,000 attendees. This provided the direct route to contemporary global franchising issues and trends that I was after. Five areas of particular interest were:

• Staffing

• Diversity

• The speed of change

• The need for flexibility

• The regulatory environment

Staffing

This first burning issue centred on finding and retaining staff – in particular, franchisee staff. This has been a challenge worldwide and topped Franchize Consultants’ Franchising Confidence Index as the number one challenge identified by New Zealand franchisors for 2023.

Many franchisors and franchise associations from around the world shared experiences about finding suitable staff and the challenges faced by franchisees. Aligned with this are the challenges of increasing labour costs. Indeed, some franchisors have found staffing such an issue they’ve needed to explore how their franchise model can work (for franchisees and the franchisor) on a smaller unit-level scale with fewer staff. I know this is also a consideration for some NZ franchises, where the labour shortage for some skills is so extreme that some franchisees are regressing back toward an owner-operator format.

And the labour market is moving further still, with many noting changes to labour force behaviour and wants – such as a move toward some employees working multiple jobs (akin to the Gig Economy) across different day parts, and increasingly valuing flexible work. Further challenges have come from long Covid, and general attitudes to work driving absenteeism, particularly on Friday and Monday mornings.

With staff such a foundational aspect of growth and success, there were many approaches to solving the problem. Perhaps no-one put the issue better than John Payton of Dine Brands who noted that, ‘To win in the marketplace, you must first win in the workplace.’ He talked about how strong brands need to attract world-class talent, and how important it is that franchisees and managers see team members as the unique individuals that they are. Accordingly – and slightly contrary to large franchise company standardisation – he noted how important it is that employees can authentically express themselves, including their sometimes irreverent sense of humour.

Chris Kempczinski, CEO of McDonald’s, had a label for both identifying their challenge and strategy on finding and retaining staff. He talked of McDonald’s EVP or Employee Value Proposition, asking, ‘Why would someone come to (work at) McDonald’s?’ He noted that it could not just be for the pay and benefits alone – it needed to be more personal, including how employees connect with their managers. That required managers to understand employees’ hopes and dreams and relevant issues, and to make employees aware of options and career development opportunities. But even then, it wouldn’t be easy for employers. Quoting Ray Kroc, Chris noted, ‘If you are not green and growing, then you are ripe and rotting.’

Clearly, these companies aren’t looking for quantity of employees –they’re looking for ways to add and retain real employee talent

Drew Breeze knows a lot about winning teams, having played quarterback for 20 seasons in the NFL, including becoming Super Bowl champion and MVP. Now a multi-unit franchisee with multiple brands, and a new franchisor himself with Walk-On’s Sports Bistreaux, he spoke with authority on developing winning teams. He noted the more you can do from a team building perspective the better, and that genuine time is needed to get to know team members. He said he would attend as many of his teammates’ family and charity events as he practically could – you can sense how this powerful attitude can be applied to any business.

Diversity

Related to the staffing issue, diversity was also an important theme within the conference. Speakers from Yum! Brands, Marriott and The Goddard School talked about the importance of diversity throughout an organisation, from a franchisor’s board of directors through to franchisees and their staff. They also discussed the relationship between franchisee diversity and customers – including in different markets.

These companies explained how they fostered diversity, and how that requires real commitment from the top. In one wonderful demonstration, James Fripp, Chief Diversity Officer of Yum! Brands, explained a reverse mentoring programme whereby their Chief Legal Officer was mentored by an African American employee 10-11 levels down the organisation. All spoke of encouraging diversity throughout all levels by talking actively about career opportunities with all staff.

Speed of change

Franchises around the world have been rocked by Covid, staffing challenges, rising operating expenses, changes in technology (including AI), customer behaviour and so on. But it is not just isolated changes; it is the increasing speed and magnitude of change. As John Payton put it, ‘Change is the biggest change. It is no longer linear, it is exponential.’

Of course, many franchise companies in New Zealand have done an incredible job adapting their franchisee business and support models to cope with the pandemic and changing reality. However, it is very interesting to hear how the largest brands approach change, given that their changes can involve several hundred or even thousands of franchisees, some of whom may be very well-resourced. Big companies often need a clearer approach.

Different times have called for changes and variants to some established models. Some US experiences serve as a reminder, particularly in food retail where ghost kitchens and ghost kitchen brands have emerged. In the craziest example, franchisees of one brand were producing food for another, mostly virtual brand (eg. Mr Beast Burger). This actually helped not just individual franchisees but whole struggling chains during Covid. There is even a Ghost Kitchen franchise, which produces the food of certain otherwise normally franchised (eg. Quiznos, IHOP and Cinnabon) and other brands for online ordering, delivery and pickup.

A flexible franchising culture

While ghost kitchens may be extreme examples, franchisors talked generally about setting a great franchising culture that is ready for change. One session in particular focused on how collaborative franchisor-franchisee leadership drives system change, now more than ever. As every experienced franchisor knows, you can’t lead with a style of command and control; you can’t manage franchise system change via your franchise agreement. Instead, you need to set the right culture and involve franchisees in the change management journey.

With regard to establishing the right culture, the franchisors involved variously noted the importance of making franchisee success the most important key performance indicator; focusing on mutual respect and staying highly engaged with franchisees; and being very clear on values. Think about franchisees as the most important people in the room.

Panellists also talked on being very clear about the purpose for any proposed change. For example, is it going to make the franchise system better, or is it a change that the government is making us do? If the answer to both is ‘no’, look out! But whatever the reason, franchisees really need to understand the change, including what is proposed, what is driving it, and the potential outcome.

Franchise Advisory Councils, committees and focus groups play a significant role here, as franchisors work collaboratively with franchisees throughout the change management process from ideation to implementation. And, as the panellists noted, it is important to understand the impact or Return on Investment for change from the franchisee’s point of view – which can be quite different from how a franchisor might perceive it to be.

Ever-increasing regulation

Perhaps one of the strongest themes and messages from the conference was the need to protect franchising from misplaced, and sometimes interest group-sponsored, legislation and general regulatory overreach.

In the United States, there are several areas of regulation either on the horizon, in-train or already in effect, with key areas of advocacy relating to joint employer standards (which could make franchisors liable for franchisee employees), franchise relationship laws, and independent contractor tests (which could make some franchisees employees rather than business owners).

This is also a worldwide issue for franchising, with many countries reporting similar issues where various laws have been proposed and/ or enacted that in some way impact the reputation, cost and potential value that can be attributed to franchising from both a franchisor and franchisee perspective.

For the USA, the threat is very real. As Chris Kempczinksi of McDonald’s noted with his warm, calm yet blisteringly direct message, ‘The reality is that our business model is under attack … if you are not paying attention to these changes in regulations, you have your head in the sand.’

He also asked the audience (but really the government) to project forward in time and to think about a world in which franchising did not exist, noting the potential impact on jobs and economy. ‘Imagine if franchising went away. Jobs would evaporate. We would lose vital stability.’ It was an important reminder of the impact of legislation for us in New Zealand, too.

This call to action was echoed by the International Franchise Association CEO, Matt Haller, who talked about franchising being at a crossroads, and how they need both franchisors and franchisees to help. Indeed, franchisees in the United States are highly involved in advocacy to help educate and protect franchising.

Final thoughts

Franchising in the United States is certainly big and operating in a different environment compared to New Zealand. Not surprisingly, US companies talked of incredible franchise growth and levels of enquiry – and also great access to capital. There’s a huge trend of private equity firms actively acquiring/investing in several franchising brands. Indeed, at the conference, there were multiple private equity firms both participating in the conference and/or eyeing potential prospective purchases. One such firm, Roark Capital, has investments in more than 50 franchise companies.

Yet despite the obvious differences, many issues and approaches are largely universal. Challenges of staffing, franchise system change and regulatory over-reach are similar, as are many of the strategies to address them. However, franchise size and experience can drive greater sophistication in structures and approaches – something I noted particularly on certain topics, such as the structure and management of franchisee support groups, Franchise Advisory Councils and franchise recruitment.

With our own National Franchise Conference coming up in Christchurch in late August (see page 30), it’s interesting to reflect on the value of such events. Having been to many overseas and FANZ conferences over the years I have to say how valuable and informative our conferences are – and how proud we should be of having such an approachable and supportive environment for New Zealand franchisors, franchisees and service providers.

I look forward both to Christchurch and to returning to the US to enjoy that wider perspective again – and next time, I’ll slow down a little more, honest, officer!

About the Author

Dr Callum Floyd is Managing Director of Franchize Consultants and has advised many new and established franchise systems, as well as facilitating training courses for franchise executives.