The McDonalds Franchise Agreement

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					                                                                                                                                                                                                                         s   McDonald’s only offers franchises to
                                  Background                           McDonald’s - A Global                                                                                                                                 individuals - not to partnerships, absentee
                                                                       Organisation fulfilling                                                                                                                               investors or families. Potential franchisees
                  Franchising is a particularly attractive                 local needs                                                                                                                                       are expected to divest themselves of any
                  business opportunity for people with                                                                                                                                                                       other business interests. They are also
                  entrepreneurial flair. It is a route to owning                                                                                                                                                             required to invest approximately nine
                  your own business without the high risk          McDonald’s is one of the most successful                                                                                                                  unpaid months to learn all aspects of running
                  element normally attached to owning a sole       examples of a truly global organisation. It                                                                                                               a McDonald’s restaurant.
                  trader’s business. Through franchising, the      operates in 111 countries and serves some 38
                  entrepreneur buys into an operation whose        million people every day - making it the                                                                                                              s   The franchisee is expected to become
                  business methods have been tried and tested      largest food service company in the world.                                                                                                                involved in McDonald’s community,
                  many times over and therefore the rate of        Achieving a global presence, however, does                                                                                                                civic and charitable activities.
                  business failure is usually quite low.           not automatically mean a company will be
                                                                   successful in every country. In fact, there are                                                                                                       s   Individual franchisees must have their
                  In the US, almost a third of all retail sales    many examples of global companies whose                                                                                                                   own capital to commit to the business.
                  come from franchising operations. In             brands have failed to make a strong impact in                                                                                                             The cost of entering a franchise operation
                  Ireland, however, less than 10 per cent of       the Irish market.                                                                                                                                         can sometimes be prohibitive. However,

    The           retail sales are cu rren tly through
                  franchising. This would suggest that
                  franchising is set to become one of the
                  major growth areas in Ireland in the
                                                                   McDonald’s is one of a number of brands that
                                                                   command instant recognition in virtually
                                                                                                                                                                                                                             to overcome this limitation, McDonald’s
                                                                                                                                                                                                                             provides a number of alternatives to
                                                                                                                                                                                                                             entering into a franchise agreement,
                                                                                                                                                                                                                             requiring different levels of financial
                                                                   every country of the world. A key factor in
                  coming years.                                    achieving this level of global success lies in    McDonald’s, The Waterfront, Drogheda.                                                                   commitment.


McDonald’s        McDonald’s is the largest franchise
                  restaurant organisation in the world, with
                  over 23,300 restaurants in 111 countries.
                                                                   McDonald’s commitment to understanding
                                                                   the wants and needs of the consumer that are
                                                                   common across countries and those which
                                                                   differ. Based on this, it identifies which
                                                                                                                             The McDonald’s
                                                                                                                           Franchise Agreement
                                                                                                                                                                        quality, service, cleanliness and value. In
                                                                                                                                                                        return, the franchisee is granted the right to
                                                                                                                                                                        operate a McDonald’s restaurant, usually for
                                                                                                                                                                        a period of 20 years. These rights include the
                                                                                                                                                                                                                             Training to become a
                                                                                                                                                                                                                             McDonald’s Franchisee
                  Chicago businessman Ray Kroc opened the          elements of its product or service may be                                                            use of McDonald’s:
                  first McDonald’s franchise in 1955 in Des                                                          Although McDonald’s is a global business, it

 Franchise
                                                                   standardised across its international markets                                                                                                         Those who are successful at the selection
                  Plaines. The first Irish restaurant was          and which elements require a degree of            is primarily a franchise operation. Globally       s   Trade marks                                  process are then invited to begin a nine-
                  opened in 1977 and there are now 40              adaptation to allow for local differences.        over 70% of restaurants are operated by            s   Restaurant decor designs                     month training programme. The aim of the
                  restaurants serving some 150,000 people                                                            franchisees. A franchise is an agreement or a      s   Signs and equipment                          training is to achieve competency in running
                  every day. McDonald’s employs almost             The same brand name, brand symbol (the            licence to sell another company’s product or       s   Formula for menu items                       a McDonald’s restaurant. It is also designed
                  3,000 people in Ireland. Companies who           Golden Arches) and the same range of              service. It permits the individual accepting the   s   Method of operation                          to ensure that the same standards of service

Agreement         supply McDonald’s with its raw materials
                  have also generated a significant number of
                  spin-off jobs.
                                                                   products is available in every McDonald’s
                                                                   restaurant throughout the world. At the same
                                                                   time, McDonald’s responds to the specific
                                                                   local market requirements for every country it
                                                                                                                     agreement (the franchisee) to use the
                                                                                                                     established name and logo of the existing
                                                                                                                     business by agreement with the owner (the
                                                                                                                     franchiser). The franchiser provides the know-
                                                                                                                                                                        s

                                                                                                                                                                        s
                                                                                                                                                                            Method of inventory control, book
                                                                                                                                                                            keeping and accounting
                                                                                                                                                                            Marketing activities.
                                                                                                                                                                                                                         and product quality are maintained
                                                                                                                                                                                                                         throughout every McDonald’s restaurant in
                                                                                                                                                                                                                         the world. Franchisees are not charged for the
                                                                                                                                                                                                                         training, although they do have to support
                                                                                                                     how and the business format in return for an
                  In this business study the franchise             enters. For example, in deference to the local                                                                                                        themselves financially during this period.
                                                                                                                     annual fee. This is usually a negotiated               So what does it take to
                  operation of McDonald’s is described. The        culture in India, burgers are made with mutton    percentage of sales, together with a negotiated
                  study also examines the benefits of running      and the global favourite Big MacTM goes by the                                                           become a McDonald’s                          Training is normally carried out at a
                                                                                                                     initial payment.
                  a McDonald’s franchise operation and the         name ‘Maharaja Mac’. In Israel, McDonald’s                                                                                                            McDonald’s restaurant convenient to the
                                                                                                                                                                                 Franchisee?                             franchisees and is supplemented by a number
                  essential requirements necessary to become       burgers are made with kosher beef, thereby        Under the McDonald’s franchise agreement
A Partnership     part of the McDonald’s franchise team.           fulfilling local religious requirements.          the franchisee agrees to operate the business
                                                                                                                     in accordance with McDonald’s standards of
                                                                                                                                                                        McDonald’s franchisees play a critical role
                                                                                                                                                                        in delivering the McDonald’s brand
                                                                                                                                                                                                                         of residential courses at training centres in
                                                                                                                                                                                                                         Ireland and the UK. Training focuses on the
                                                                                                                                                                                                                         areas critical to success in operating a
                                                                                                                                                                        promise to consumers. Because of this,           dynamic McDonald’s restaurant, such as:
                                                                                                                                                                        McDonald’s has a rigorous process in

 approach to                                                                                                                                                            place for ensuring that potential new
                                                                                                                                                                        franchisees have what it takes to run a
                                                                                                                                                                        McDonald’s restaurant:
                                                                                                                                                                                                                         s
                                                                                                                                                                                                                         s
                                                                                                                                                                                                                         s
                                                                                                                                                                                                                             Team building
                                                                                                                                                                                                                             Handling customer enquiries
                                                                                                                                                                                                                             First aid
                                                                                                                                                                                                                         s   People skills
                                                                                                                                                                        s   Franchisees must possess an                  s   Business management.

  business                                                                                                                                                                  entrepreneurial flair for business. They
                                                                                                                                                                            must possess the drive and energy
                                                                                                                                                                            necessary for running a busy restaurant
                                                                                                                                                                            to the standards set by McDonald’s.

                                                                                                                                                                        s   Franchisees must possess a high level of
                                                                                                                                                                            personal commitment and demonstrate
                                                                                                                                                                            strong managerial skills. These qualities
                                                                                                                                                                            are essential to run a business that will
  Business 2000                                                                                                                                                             employ 50 people or more and serve
                  Ilac Centre, Dublin.                                                                               Franchising.                                           some half a million customers a year.        Sprucefield, Lisburn, Co. Antrim.




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 The first three months of training is spent as                  matches this commitment. It offers                   for advice and practical help with any               felt that with a McDonald’s franchise                (RMCC), which was established in
 part of the restaurant crew. The focus of this                  individual entrepreneurs all of the advantages       aspect of the running of the business.               the risk was far more calculated.                    Ireland in 1997. RMCC collection                TASKS AND ACTIVITIES
 phase is to master the basics - cooking and                     of running one of the world’s most successful        In Ireland, McDonald’s franchisees                   According to Gerry, the management                   b o x e s a re d is p la y e d in a ll th e
 preparing food, serving customers and                           global franchise operations. It does this in a       also help each other out. For example,               skills and the successful business systems           restaurants and the money collected is
 cleaning. Trainees will also learn operational                  number of ways:                                      existing franchisees send staff and                  that he learnt from McDonald’s would                                                                       (a ) D e s c rib e w h a t is me a n t b y
 theory about cooking times, temperatures                                                                             managers to help new franchisees with
                                                                                                                                                                                                                                sent to various Irish children’s causes.        1     franchising.
                                                                                                                                                                           have taken him years to acquire on his               Each restaurant has an annual Ronald
 and hygiene standards.                                          s   A McDonald’s Franchise offers an                 the opening of their restaurants.                    own.                                                 McDonald’s Charity day during which            (b) List the factors critical to the success of
                                                                     entrepreneurial approach to
 The next three months is focused on junior                          business                                         Joe Byrne, a McDonald’s franchisee in            s
                                                                                                                                                                                                                                one pound is donated to the charity for        a franchise operation.
                                                                                                                                                                           McDonald’s enjoys global brand
 management training, which prepares the                             McDonald’s franchisees enjoy the                 Wa t e r f o r d b e g a n w o r k i n g f o r       awareness which it supports with                     every Big MacTM sold. The most recent
 franchisee for managing daily restaurant                            freedom and challenge of running their           McDonald’s while he was still at                     local marketing activities                           day succeeded in raising over £20,000          (c) Describe the factors that may lead to
 operations. The final period of training                            own business. Ray Doherty has been               school. He spent seventeen years with                McDonald’s franchisees benefit from using            for the Charity.                               the failure of a franchise operation.
 concentrates on the more senior managerial                          running a McDonald’s franchise in Cork           the organisation and worked his way                  one of the best known brands
 duties such as stock ordering, profit and loss                      for 15 years. Before entering into a             up to becoming a restaurant manager                  in the world. The McDonald’s brand                   Joe Byrne and his team in Waterford
 accounts, inventory control and hiring and                          franchise agreement with McDonald’s he           by the age of 29. He managed many of                 commands instant recognition in virtually            are currently raising funds for a
 motivating staff.                                                   spent eleven years working for a large           the McDonald’s restaurants in Dublin                 every country of the world. McDonald’s               children’s playroom in Waterford                    (a) Outline how franchising can offer
                                                                     company. He had a lifelong ambition to           before moving to Waterford. Although                 invests heavily in national advertising,
                                                                                                                                                                                                                                                                                2   a more successful route into business
                                                                                                                                                                                                                                Regional Hospital.
 Participants’ performance on the training                           run his own business and McDonald’s              he always wanted the challenge of                    especially TV advertising, and sales                                                                than going into business as a sole trader.
 programme is assessed on an ongoing                                 provided the necessary route. According          running his own business he was aware                promotional activities in every country in
 basis by a McDonald’s field consultant. A                                                                                                                                                                                      Ray Doherty and his team in Cork
                                                                     to him, the McDonald’s system is ideal for       of the high rates of small business                  which it operates. This support maintains                                                           (b) List the disadvantages or limitations of
 field consultant is a person who works ‘in                                                                           failure. McDonald’s however provided                                                                      renovated a room at the University
                                                                     those with entrepreneurial flair. It                                                                  high levels of interest and awareness in the                                                        being a franchisee.
 the field’; ie on a day-to-day basis with a                                                                          the ideal route. The back-up support                 brand and its products - all to the benefit of       Hospital creating a children’s playroom.
                                                                     provides an opportunity for entrepreneurs
 franchisee and his managers, crew and                               with a love of retailing and who enjoy           and the McDonald’s proven franchise                  its individual franchisees.                          They have also just completed a play area
 administrative team to advise as requested.                         dealing with the challenges and problems         methods were just what he needed to                                                                       in the waiting room at the hospital.
 He/she serves as an advisor on ‘best practice’.                     of running their own business, whilst            take the fear out of going into business             When Ray Doherty identified an                                                                             Describe how the McDonald’s franchise
                                                                     allowing them to reap the benefits of an         for himself.                                         opportunity for a quick service                                                                      3     operation works.
 Those who successfully complete the                                 established brand identity.                                                                           restaurant in Cork, he examined the
 training programme are then offered their                                                                                                                                 suitability of a number of different
 own McDonald’s franchise.                                       s   McDonald’s provides back-up                                                                           organisations. However, he came to
                                                                     support and advice to franchisees                                                                     the conclusion that McDonald’s as the                                                                    Outline the advantages of McDonald’s
                                                                                                                                                                           most recognised brand in the world,
                                                                                                                                                                                                                                                                                4   franchise to (a) the McDonald’s franchisee
       The benefits for                                              Franchisees enjoy the comfort of a
                                                                     sound support structure to help them                                                                  together with its high standards of quality                                                         and (b) the McDonald’s franchiser.
    McDonald’s Franchisees                                           through any difficult business periods.                                                               and service, was the one to choose.
                                                                     E ach f r anchisee has th eir ow n
 All of this may appear to be a lot to ask                           McDonald’s field consultant. The                                                                  s   Superior quality and service is
                                                                     consultant visits the franchisee on a                                                                 delivered in a consistent manner                                                                         Outline the key factors which have
 fro m s o m e o n e w i s h i n g t o e nter the                                                                                                                                                                                                                               5   contributed to the global success of
 business. However, in return, McDonald’s                            regular basis and is always available                                                                 throughout every McDonald’s
                                                                                                                                                                           restaurant                                                                                          the McDonald’s organisation.
                                                                                                                                                                           There is a high level of product and
                                                                                                                                                                           service quality standardisation among all
                                                                                                                                                                                                                            Ronald McDonald and friends.
                                                                                                                                                                           McDonald’s franchise operations. This
                                                                                                                                                                           means that no matter where in the world                                                                   Describe the qualities that are essential
                                                                                                                                                                                                                                                                                6    in order to become a McDonald’s
                                                                                                                  Ilac Centre, Dublin.                                     a McDonald’s meal is consumed,                      A partnership approach
                                                                                                                                                                           customers are assured that the same high                                                            franchisee. Explain why they are essential
                                                                                                                  s   A McDonald’s Franchise offers a
                                                                                                                                                                                                                                     to success                                qualities.
                                                                                                                                                                           level of service and quality will be
                                                                                                                      more successful route into business                  provided.
                                                                                                                      A McDonald’s franchise operation is a                                                                 Franchising has been the key to McDonald’s
                                                                                                                      more successful route into business than         s   McDonald’s makes a valuable                      global success. Through franchising it has
                                                                                                                      setting up in business as a sole trader.                                                              grown to become the world’s largest                      Develop and describe a franchise
                                                                                                                      Franchisees gain access to McDonald’s
                                                                                                                                                                           contribution at local community                                                                      7    agreement for any business of your
                                                                                                                                                                           level                                            restaurant provider. McDonald’s franchise
                                                                                                                      proven franchise methods. This provides              In every country where McDonald’s                operation is based very much on a partnership      choice. Outline what is required from (a)
                                                                                                                      the assistance necessary to establish and            does business, it strives to make a                                                                 the franchisee and (b) the franchiser.
                                                                                                                                                                                                                            approach to business. Each franchisee brings
                                                                                                                      run the business profitably. Because of              valuable contribution at both a national         their own individual skills and qualities to the
                                                                                                                      this, the risk attached to setting up in             and local level. All franchisees are             organisation. The Big MacTM, Filet-o-Fish,
                                                                                                                      business is vastly reduced.                          therefore encouraged to put something            Drive-Thru and Playlands are just some of              What lessons can other business
                                                                                                                                                                           back into their communities. They do
                                                                                                                                                                                                                            the products and concepts which were                8  organisations and entrepreneurs learn
                                                                                                                      Gerry Riordan worked in the banking                  this by involving themselves and their
                                                                                                                      industry for a number of years before                staff as much as possible in local               developed by McDonald’s franchisees. By            from this business study?
                                                                                                                      opening his McDonald’s franchise                     events, schools, community groups                encouraging its franchisees to shape the
                                                                                                                      restaurant in Blackrock, Dublin. From                and by raising funds for local charities.        future of the McDonald’s organisation
                                                                                                                      his banking experience he was aware                                                                   through ambition and ideas, McDonald’s has             While every effort has been made to ensure the accuracy of
                                                                                                                      of the high risks associated with setting            All Irish franchisees are involved with          created a truly world-wide story of personal         information contained in this case study, no liability shall attach
                                                                                                                                                                                                                                                                                to either The Irish Times Ltd or Woodgrange Consultants Ltd for
 HGV from Snowcrest Services Ltd - McDonald’s Distribution Co.                                                        up your own business. However, he                    Ronald McDonald Children’s Charities             success.                                                        any errors or omissions in this case study.



          Business 2000



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