Former franchisees file complaint in Chicago says company pushed them out of business
Crusader Staff Report
Fifty-two former Black McDonald franchise owners on Tuesday, September 1, filed a massive $1 billion lawsuit in federal court in Chicago, alleging the fast food giant used racially discriminatory practices that drained them financially and forced them out of business.
The complaint is the third racial discrimination lawsuit to hit McDonald’s this year. In January, two Black executives at McDonald’s filed a lawsuit accusing the fast food chain of discrimination and removing many Black employees from its top ranks.
The latest lawsuit involves over 50 former Black McDonald’s franchise owners who together operated over 200 restaurants between 2010 and 2020. McDonald’s corporate headquarters is based in Chicago’s West Loop.
According to the complaint, McDonald’s steered Black franchisees toward restaurants in low-income neighborhoods that have higher security and insurance costs and lower volume sales. The lawsuit said the plaintiffs’ average annual revenue was $2 million, at least $700,000 less than McDonald’s national average for its franchisees between 2011 and 2016. Last year, the national average sales for its franchisees climbed to $2.9 million.
The 52 plaintiffs are seeking $4 million to $5 million for each of the 200 locations. They say that is the amount each location lost on average after subtracting the restaurants’ costs from missed revenue.
Black operators in the lawsuit also alleged that they faced retaliation from McDonald’s after they rejected offers to continue running their restaurants in low-income neighborhoods. The plaintiffs also allege that McDonald’s provided misleading projections that persuaded them to buy undesirable franchises and denied them better locations typically given to white franchisees, who operated safer restaurants with higher sales and lower security costs.
“Revenue, at McDonald’s, is based on one factor and one factor only: location,” plaintiffs’ attorney James Ferraro told CNBC Tuesday. “It has nothing to do with the taste of a Big Mac. You don’t go to a different McDonald’s because the Big Macs are better. You go to the closest McDonald’s, period.”
It’s unclear if the former restaurant owners are past or current members of the Black McDonald’s Operators Association (BMOA), which was formed in Chicago after Herman Petty operated the nation’s first Black-owned McDonald’s restaurant, which was operated at Marquette Drive and Stony Island in South Shore in 1968. Black businessman and Senate candidate Willie Wilson became a millionaire as a McDonald’s franchise owner.
The late millionaire Cirilo McSween, who was one of the most successful Black McDonald’s franchise owners, opened a McDonald’s at 230 S. State St. in 1979—one of 11 franchises. In 1983, the State Street McDonald’s was the No.1 restaurant in the country, with $4 million in annual sales, according to Ebony magazine.
Since then, dozens of Black-owned McDonald franchises have popped up across Chicago’s South and West sides and Black neighborhoods in American cities.
Today there are 65 Black-owned McDonald’s franchises in the Chicago area, according to the BMOA’s website.
Over the decades, McDonald’s shared a complicated relationship with its Black franchise owners, who have similar allegations against the fast food giant. Today, the road to prosperity under the golden arches may not be as rosy.
Responding to a request for comment for this story, Barbara Thompson, Executive Vice President of BMOA, said: “We are not at liberty to discuss the details for the filing.”
McDonald’s said that while it may recommend locations, franchise owners ultimately decide where to operate its restaurants.
McDonald’s also said the plaintiffs operated restaurants in a wide variety of communities across the country and that the company sold high-performing franchises to Black operators.
“These allegations fly in the face of everything we stand for as an organization and as a partner to communities and small business owners around the world,” McDonald’s said in a statement. “Not only do we categorically deny the allegations that these franchisees were unable to succeed because of any form of discrimination by McDonald’s, we are confident that the facts will show how committed we are to the diversity and equal opportunity of the McDonald’s System, including across our franchisees, suppliers and employees.”
Ferraro’s law firm began investigating his plaintiff’s allegations in February. In early June, Ferraro’s firm informed McDonald’s of the lawsuit. Several weeks later, in the wake of nationwide protests and riots against police brutality and racism, McDonald’s CEO Chris Kempczinski appeared on CNBC’s “Mad Money with Jim Cramer” and claimed that the company had probably minted more Black millionaires than any other corporation.
According to McDonald’s website, the average cost for starting a franchise ranges between $1,008,000 to $2,214,080. This includes an initial franchise fee of $45,000 that must be paid to McDonald’s. In Black neighborhoods, the minimum amount may be lower. A Crusader article in 2018 reported that it costs $500,000 for Black franchisees to open a franchise and McDonald’s has limits on how much applicants can borrow to purchase a license.
Reports said McDonald’s waived some of its requirements so Petty could live out his dream of being a Black franchise owner.
In a video to McDonald’s employees and suppliers about the lawsuit that was viewed by CNBC, Kempczinski reiterated that the company stands for diversity, equity and inclusion and said the lawsuit’s claims have been investigated.
“Based upon our review, we disagree with the claims in this lawsuit and we intend to strongly defend against it,” Kempczinski said.
In late July, McDonald’s shared its updated corporate values and more on its commitment to diversity and inclusion.
Among its deliverables are plans to enhance its efforts to attract and recruit diverse franchisees, although McDonald’s did not define what makes an operator “diverse.”
In December, Business Insider reported that the number of Black franchisees has been shrinking for years. According to the federal lawsuit, the number of McDonald’s Black operators hit a record high in 1998 of 377. In 2020, there are only 186, despite McDonald’s more than doubling its global restaurant count during that time.
The lawsuit claims that the decline in Black franchisees was a deliberate effort from McDonald’s, which allegedly graded Black-operated restaurants unfairly, leading to poor internal reviews and subsequent denials of growth opportunities and better franchising terms.
McDonald’s said the number of franchisees has been consolidated across all racial groups in recent years. The company claims that the ratio of Black operators is broadly unchanged.
The latest legal battle is at least the third racial discrimination lawsuit filed against McDonald’s this year. In January, two senior McDonald’s executives, Vicki Guster-Hines and Domineca Neal, filed a lawsuit against the company, alleging racial discrimination.
The lawsuit claims that the chain fired African-American leadership and pushed Black franchisees out. McDonald’s has argued that the court should strike some allegations from the suit, including those regarding Black operators.
The executives also say they worked in a “hostile and abusive work environment” that included threats, derogatory racial comments and barriers that kept Blacks from advancing in the company.
Also, this year, three Black restaurant workers in Florida sued McDonald’s, alleging racial harassment, discrimination, and retaliation.