A Rare Bankruptcy for a McDonald’s Franchisee

McDonald’s (NYSE: MCD) apparently only wants big operators serving up fries with that shake as one small franchisee just declared bankruptcy — a rarity among its operators — and others have been pushed to sell their handful of locations to bigger franchisees.

Brown Customer Delight Group, which ran six McDonald’s in Iowa, said the restaurants generated gross sales of $7.6 million year to date through August but recorded $4.5 million in losses last year, due in large part to two factors. First, Brown was required by the chain to upgrade its restaurants with such things as double-lane drive-through windows, digital menu boards, and the new equipment required to serve all-day breakfast — and those stores didn’t generate enough revenue to cover the costs of the improvements. Second, the parent chain opened several new, competing McDonald’s in its markets.

BCDG reported having about $15.6 million in liabilities but just $6.7 million in assets.

According to Nation’s Restaurant News, bankruptcies among McDonald’s franchisees are a relatively rare occurrence because the agreement franchisees sign tends to discourage them. Instead, it pushes for selling stores to another franchisee. BCDG is hoping McDonald’s will buy its restaurants from it, though the fast-food chain’s refranchising push might make that unlikely, even though it is only a half dozen restaurants.

Approximately 85% of McDonald’s are owned by franchisees, but the burger king expects to sell about 4,000 company-owned restaurants to franchisees through 2018, en route to its long-term goal of becoming 95% franchised.

BloombergBusinessweek, however, reports McDonald’s is also seeking to squeeze out the little guys like BCDG that own just a handful of restaurants. It says since 2014, the number of U.S. franchisees has fallen by 2.6%, even though the number of franchised locations has grown 1.2%, suggesting more restaurants are being consolidated into fewer hands.

Although McDonald’s has long had a reputation for championing the expansion of small owners who have just one or two stores, as the burger chain has sought to reverse its loss of customers, it has made expensive changes such as those that dogged BCDG, and apparently feels bigger operators will be better able to finance the costs.

While bankruptcies among McDonald’s franchisees may still be rare, we may start to see more of them if the chain’s restaurant don’t start generating more foot traffic — or at the least, we’ll see the big guys continue to swallow smaller ones.

Rich Duprey has no position in any stocks mentioned.