Melissa Harris-Perry: This is The Takeaway. I'm Melissa Harris-Perry.

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Oh yes. Before inflation gained for the sandwich, customers could get Subway's Iconic $5 foot long anywhere in the country, whether it be an airport in California or a strip mall in Florida. Unlike many popular meal deals, that Iconic Sandwich is the product, the franchise business model. Where individual business owners pay a licensing fee to a larger company to operate a franchise location, but the franchise model comes with its critics. Recently, some franchisees have resisted demands of corporate owners citing smaller profits and higher operating fees. Joining us now is Lydia DePillis, an economics reporter at the New York Times. Lydia, thanks for being with us on The Takeaway.

Lydia: Hello, Melissa.

Melissa Harris-Perry: All right, You've been reporting on this. What are the critiques of the franchisees? What are we seeing?

Lydia: First of all, I'll just say that these critiques aren't totally new. There's been tensions for the last couple of decades. You might remember some news around Quiznos, for example, where franchisees felt like there was too much control over their menus and pricing and that they couldn't make money. Eventually, that chain went through some real contraction. I think it's been heightened in the last few months or years by a few things.

One is the introduction of private equity buyers who often want a quicker return, so they try to make changes that franchisees find onerous or not great for their bottom lines. What it comes down to is this is an agreement between the franchisor and the franchisee, and it's supposed to work out well for everybody. When it works the way it's supposed to, that is true. When the franchisor wants to squeeze the franchisees for more of those revenues, they can do that in a few ways.

They try to change the terms of contracts after they've been agreed to, to impose fees for things like technology and new territories or other changes that the franchisee might want to make, which are originally supposed to all be covered by your franchise fee. Just the royalties that you pay for the privilege of using a proven business model. That's why you started to see more resistance, I think, in recent months, along with greater interest from the Biden administration, which is asking the question really, are these independent businesses, or is the franchisor exerting so much control that they look a little bit more like employees.

Melissa Harris-Perry: We do know that because of the need for more workers coming out of the pandemic that the labor shortage has meant that for many of these franchisees, they may be paying higher wages to still low-wage employees. I'm wondering if that is part of where the tension is emerging.

Lydia: Sure. I think from a franchisee's perspective, they get squeezed from both sides. It's hard to find employees who will work for the wages that they used to offer, so they're trying to raise that offer and from the franchisor who often wants to keep that wage rate as a share of their revenues low. Sometimes I've seen numbers around 30%. Your total cost of labor shouldn't exceed 30% of your revenues, that sort of guideline. This is why for a long time actually unions have been interested in this conversation.

You may remember back in the early fight for 15 days, the Service Employees International Union had an interesting legal strategy to try to basically make franchisors liable for all labor violations committed by their franchisees. It's something called Joint Employer Standard. The reason for that was a few multiple folds. They both thought that the franchisor was the ultimate caller of the shots.

They determined the kind of revenues that a franchisee could make and thereby, how well they could pay their employees and treat their employees. The other is that if you try to unionize a large chain such as McDonald's, it's very difficult to go store by store by store, especially when the franchisor can find ways to terminate stores or punish stores if they allow that to happen. If franchisors are declared a joint employer by, say, the National Labor Relations Board, that allows them to be unionized on a national basis rather than one by one.

Melissa Harris-Perry: There are power imbalances here between franchisees and franchisors that you're describing in pure economic terms. There are other questions around race, identity, geographic location too. Is that right?

Lydia: The franchise industry has long prided itself on the way in which it acts as an onboard to small business ownership for many diverse entrepreneurs. Many of whom may not have the advantages of a lot of startup capital or having gone to business school. This is like "business in a box" that you can pretty easily get an SBA loan for and build from there. There is a whole McDonald's franchisee association just for black owners, and there's a long history of that.

I want to caveat that by saying it makes it more problematic when the franchisor, which is not a particularly diverse set of people, exerts a ton of control over their franchisees. Because there is that power imbalance, they can basically offer franchisees take it or leave it contracts that often a new business owner might not fully understand. These are very very long complicated agreements and they can go wrong in ways that you don't expect.

I think it's totally great to showcase how perhaps relatively more diverse your ownership base is relative to a regular, normal, non-franchise small business. It does make it worse if you're then creating perhaps worse outcomes for a lot of people when problems arise in the franchise relationship. Another aspect of this is obviously hoteliers. You may notice that if you go to a Hilton Garden Inn or a Red Roof, a lot of them are owned by Indian American immigrants who came in the '70s and '80s, bought these hotels.

There's a very powerful, large lobbying group for them now. They, in particular, feel like they've been squeezed by the franchisor hotel flags, they're called Hilton, Marriott, et cetera, for things like loyalty points, which cost them money. Even the guest gets a cheap room, but that's on the back of the franchisee, not the hotel flag, or things like rebates where they're forced to use certain vendors that then pay kickbacks to the franchisor for the privilege of selling to their entire franchisee base on the theory that gets everybody lower rates but a slice of that is taken by the brand name.

Melissa Harris-Perry: Lydia DePillis is an economics reporter at the New York Times. Thanks so much for your time.

Lydia: My pleasure.

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Melissa Harris-Perry: All right. Stick with us, we're going to take a quick break, but we're going to be right back talking a little bit more about franchising and the historic connection between McDonald's and the civil rights movement. This is The Takeaway.

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This is The Takeaway. I'm Melissa Harris-Perry. Do you remember this classic 1990s McDonald's commercial?

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Speaker 3: Hey, is Mike Calvin.

Speaker 4: I haven't seen him for a while.

Speaker 3: Wonder where he's heading?

Speaker 4: I heard he got a job.

Speaker 3: Is that right?

Speaker 4: Yes.

Speaker 3: Well, it's about time he got himself together.

Speaker 4: Now that you mention it, there is something different about him. Just go to show you can't judge a book by its cover.

[end of video playback]

Melissa Harris-Perry: McDonald's is one of the most ubiquitous franchises in the country with over 13,000 storefronts selling more than a half billion big max annually. The franchise chain has a very particular relationship with Black communities, as the Calvin commercial reminds us.

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Speaker 3: Well, I'm just glad somebody believed in him enough to give him a chance, wonder where he is working.

Calvin: Welcome to McDonald's, may I help you?

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Dr. Marcia Chatelain: My name is Marcia Chatelain, I'm a professor of History and African American Studies at Georgetown University. I'm the author of the book Franchise: The Golden Arches in Black America. Black McDonald's franchisees have become fixtures in the neighborhoods that they started in and the neighbor's hoods they expand in. We're talking about Chicago, Detroit, Kansas City, St. Louis. These are these Black communities that relied on the entry of fast food for those first jobs.

They're giving money to the HBCUs, they are lobbying for Black advertising firms to come into McDonald's and create that content from the '80s. For those of you old enough to remember Calvin, but I think more than anything else, they're becoming incredibly influential because they are a small cohort of Black millionaires who are the face of a way of looking at opportunity. Over this 50-plus-year period of time, the accumulation of black wealth through fast-food franchising has been this really uncomfortable way of seeing the ways that economic opportunity, it comes at a high cost to communities.

Melissa Harris-Perry: Let's talk about the connection between the mid-century movement for civil rights and McDonald's franchises. How are they connected?

Dr. Marcia Chatelain: In a nutshell, after Martin Luther King Jr's assassination in 1968, similar to the George Floyd Summer we experienced in 2020. Corporations wanted to be on the right side of history. They also saw a federal government that was embracing the idea of Black capitalism, federal grants for Black-owned businesses in neighborhoods that had really been ravaged and underserved for decades. Essentially, McDonald started to recruit African-American men at this period of time to become franchise owners in Black communities.

Communities where white franchise owners no longer wanted to do business, neighborhoods that had not been targeted by the fast food industry, and this was the beginning of how I argue that McDonald's became Black.

Dr. Melissa Harris-Perry: Remind folks what franchising is relative to getting in an entrepreneurial way. What are the limitations and the possibilities there?

Dr. Marcia Chatelain: Franchising is what I call the most American idea. It's owning a business without actually owning the business. It's how I say I own my house, but I really don't. The bank does. Essentially, franchising is an agreement with a corporate entity to do business as they direct you to, but it's risky. Whether it's COVID, whether it's the rise in the cost of groceries, whether it's challenges in recruiting employees, that franchise owner assumes a lot of those risks.

Meanwhile, the franchise parent company, they get the royalties, they determine the rents, they determine the advertising strategy. I think it's a really high-pressure business, but I think it feeds into this American dream that you don't need formal education, you just need to follow the rules, and you could possibly be successful.

Dr. Melissa Harris-Perry: McDonald's begin working with Black franchises during the civil rights movement, but in more recent times, Professor Chatelain says the company has also extended its reach into new immigrant communities to create a sense of corporate solidarity. Professor Chatelain says this trend reflects a growing demand among consumers.

Dr. Marcia Chatelain: I think all of it's predicated on this idea that people within communities want to patronize businesses that look like them and seem familiar, but I think the reality of how much you can actually own a franchise sometimes blurs those attempts at solidarity.

Dr. Melissa Harris-Perry: We are seeing in this moment ways in which franchisees are trying to push back a bit, open up more space. What does your study of the history around Black franchisees in the context of McDonald's perhaps suggest for what this moment could hold?

Dr. Marcia Chatelain: There are always conflicts over what does it mean to really give opportunity. In the late 1960s, McDonald's probably said that they were putting Black franchisees in Black neighborhoods. Over the decades, that has been the basis of racial discrimination lawsuits because we also know that communities of color have challenges for business owners who want access to capital, who pay often higher rates for insurance, who sometimes have security needs that they have to pay for, who have to deal with the challenges of higher taxes in urban areas.

There's this weird thing where often these franchisee conflicts are about not just getting in the door, but how far you can get outside of certain parameters. I think it really boils down to the fact that business does not necessarily do the things that we sometimes imagine it can do. Especially when we look at businesses that are owned by people of color. They don't employ in large numbers the way that we sometimes imagine or hope they do.

They're often stressed with higher costs of doing business as well as the strain of the requests to be part of the community. I think the pivot towards business from a civil rights perspective was this deep desire to see immediacy, to see results after long battles of victories that didn't quite pan out in improving the quality of people's lives.

Dr. Melissa Harris-Perry: Ultimately in a system of capitalism-- You serve a very clear goal and bottom line, which is break even, make a profit, or if you lose money, do it in the first five years, you can do it as a tax write-off. There's really clear incentive structure and is it unfair to ask any entity with that clear incentive structure to also have an incentive of social justice, racial uplift? Are those expectations we just shouldn't have in the context of business?

Dr. Marcia Chatelain: Business is not in the service of people. We are, communities are. The way that people say LeBron James should just focus on basketball and dribbling, McDonald's should focus on burgers and fries. We, collectively, through our tax system, through our advocacy, through our communities, we take care of each other, and the presentation of Black-owned business or people of color owned business as a way of delivering racial justice is a fundamental flaw in our thinking about who is on deck when tragedy strikes or who needs to close these gaps.

It isn't the role of business to do these things because business is in the service of themselves. When we put this pressure on Black-owned business specifically, we're obscuring the fact that the reasons why we are so desperate to find answers is because the investment hasn't been there by the people who are responsible for it, and that's the federal government. Business should be taxed and they should be regulated so that we have the resources that we need for communities.

Dr. Melissa Harris-Perry: Dr. Marcia Chatelain is Professor of history and African American studies at Georgetown University. Professor Chatelain, thank you so much for taking the time with us today.

Dr. Marcia Chatelain: Thank you.

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