McDonald’s and the intangible asset of ruthless consistency

Every time McDonald’s comes up in conversation, we find a new addition to the list of why it remains one of the most successful business models in history.

Ruthless consistency — that’s what makes McDonald’s so special. Consistency is effectively an intangible asset for any fast-food brand, and McDonald’s will do anything to maintain consistency in everything it does.

The best example of this is the chain’s notorious ice cream machines.

Most people know about McDonald’s ice cream machines not because of the sugary treat but because they often don’t work. A busted ice cream machine isn’t usually enough for customers to leave. It’s just annoying. And McDonald’s absolutely could keep those machines working perfectly every day, but it chooses not to, for a very good reason.

According to a recent legal case, a (relatively) small US company called Taylor was prosecuted for sneaking into the computers of rival company Kytch. Taylor’s spies were looking for an algorithm built by Kytch that allowed McDonald’s franchise owners to bypass the special warnings on Taylor’s ice cream machines to maintain the equipment without needing Taylor’s experts.

The franchisees loved Kytch’s software because it also provided status updates and data about when the machines were working or why they had stopped working.

But it’s worth pausing here to ask why Taylor’s machines had those warnings in the first place. They obviously weren’t for safety because Kytch’s software could bypass them, and nothing bad would happen. So, why did the warnings exist?

According to the court documents, the warnings were part of an elaborate scheme to trap McDonald’s franchisees in a top-to-bottom ecosystem. This is because McDonald’s isn’t really a fast-food company. It is a real estate company, which means its business model is based on charging rents on assets it owns.

The business model is straightforward. McDonald’s buys a piece of property and rents it out to franchisees. A franchisee joins McDonald’s and begins to pay monthly rent. If they don’t hit certain revenue targets, the franchisee can be replaced in a single afternoon. McDonald’s makes billions by renting out its properties this way and supplying a brand and recipes for its franchisees. McDonald’s holds all the cards in its ecosystem.

And we do mean all the cards — right down to the ice cream machine. McDonald’s had partnered with Taylor since 1956, which gave it the “right to repair” and locked franchisees into using Taylor’s specialists to maintain its ice cream machines. The deal was attractive for Taylor because it created a captive market. In fact, Taylor earns 25% of its annual $300 million revenue from its McDonald’s contracts alone.

But the sneaky part – which is why McDonald’s business is such a world phenomenon – is that McDonald’s got a ’subsidy’ (re: kickback) each time Taylor sold an ice cream machine to one of the franchisees. In return, Taylor would get guaranteed repair work.

In other words, the purpose of the McDonald’s ice cream machine is not to produce ice cream but to pay repair bills to Taylor. Consider that a 15-minute service can cost a franchisee $350, and an ice cream machine can cost upwards of $18,000. It’s a brilliant – and highly lucrative – scheme for Taylor and the McDonald’s corporation. Not so brilliant for the franchisees.

So, it’s easy to see why those franchisees might want to use Kytch to save a few dollars, which is precisely what they began to do, en masse.

This ended up in court because McDonald’s allegedly colluded with Taylor in 2020 to warn its franchisees not to use Kytch, stating that it represented a safety hazard for staff. This was a blatant anti-competitive lie, Kytch said, because soon after receiving that email McDonald’s franchisees stopped using its software, the small company’s sales dried up overnight.

Then, in 2023, Kytch obtained a few key emails that revealed the collusion, and it took Taylor to court. After a long battle, Kytch was allowed to make its case in front of the US Copyright Office, where the evidence of collusion was so blatant that the judge granted a new exemption allowing restaurants to repair their own commercial food equipment, including McDonald’s soft-serve machines. Game over for McDonald’s and its clever kickbacks, right?

Unfortunately, while the ruling made it legal for franchisees to find alternatives to Taylor, the McDonald’s contracts still outlaw it. Kytch’s sales haven’t returned to normal because although it might be easier now to fix the ice cream machines, if McDonald’s catches its franchisees using the software, they would be in breach of their contract and could get kicked out of the building.

McDonald’s has no downside risk in ripping up contracts because it will quickly get someone else to open the same restaurant the next day. All the old employees will get paid up to when the previous franchisee was kicked out and will probably be re-hired by the new franchisee. In the meantime, any other contracts owned by the overstepping franchisee will probably get cancelled too. So, if they own other restaurants, well, they won’t anymore.

McDonald’s could easily claim that allowing third-parties to repair Taylor’s ice cream machines creates an unacceptable reputational and brand risk to its brand. Customers could plausibly get bad-tasting ice cream or become sick from contaminants. Therefore, all franchisees should continue using Taylor to ensure consistency of customer experience across all franchises.

After all, McDonald’s wants consistency above all else. That consistency is a hugely valuable intangible asset for the corporation.

That’s what made the scheme with Taylor such a smart business model. From Kytch’s perspective, it was certainly anti-competitive. However, McDonald’s only aimed to achieve consistency across all aspects of its business, which has made it one of the most powerful companies on the planet. They want customers to go to any restaurant and know what they’re getting.

It’s hard not to be impressed by McDonald’s business model of ruthless consistency.