from the producing-more-service-contract-revenue-than-actual-ice-cream dept
The ice cream machines used by a majority of McDonald’s franchise owners are notoriously flaky. Produced by Taylor Restaurant Equipment, the machines are so unreliable even the McDonald’s corporate Twitter account has made jokes about them.
This unreliability has created a (very small) cottage industry of solutions. One solution is web-based: it simply tells you which ice cream machines are down, allowing customers to avoid wasting a trip to their local franchise in search of a product that can’t be acquired at the moment.
Another solution was created by Melissa Nelson and Jeremy O’Sullivan. It’s called “Kytch.” It’s a phone-sized gadget that unscrambles the purposely inscrutable error codes generated by Taylor Restaurant Equipment ice cream machines, allowing franchisees to troubleshoot issues without having to call in a Taylor service tech at their own expense. It also allows franchisees to track problem over time to head off future problems and/or address recurring problems.
Taylor doesn’t like this. It has a lucrative contract with McDonald’s that pretty much ensures franchisees are locked into both the machines and their service contracts. The worse the machines perform, the more money Taylor makes. McDonald’s ensures Taylor’s profitability by only allowing certain equipment to be purchased and used by franchise owners. If owners decide to use unapproved equipment, McDonald’s has the power to terminate contracts and eject franchisees. In most cases, McDonald’s owns the land under the restaurant, which gives it considerable leverage when it comes to enforcing contracts.
Kytch had the potential to change the game for franchise owners by saving money on unneeded service calls and generating more revenue with increased up time. Taylor didn’t care for this at all. It managed to secure a device from Kytch through some (alleged) subterfuge and set about making its own (presumably much more expensive) version to sell to franchise owners. It also secured a lawsuit from Kytch over its anti-competitive behavior and (again, alleged) deliberate deception. And that lawsuit has resulted in a temporary restraining order against Taylor — something that followed the Federal Trade Commission opening up a preliminary investigation of McDonald’s and Taylor’s inability to produce soft-serve ice cream on a regular basis.
Now, it’s time for McDonald’s to get sued. Kytch’s co-founders have filed a lawsuit against the company, again alleging anti-competitive behavior and other shady dealings by the most recognizable fast food franchise in the world. This news comes via Andy Greenberg, writing for Wired.
Late Tuesday night, Kytch filed a long-expected legal complaint against McDonald’s, accusing the company of false advertising and tortious interference in its contracts with customers. Kytch’s cofounders, Melissa Nelson and Jeremy O’Sullivan, are asking for no less than $900 million in damages.
$900 million is a big ask, no matter what the claims are. But Kytch had a potential market of nearly 20,000 franchises in North America alone. And that market has been completely destroyed by Taylor Restaurant Machines and its primary enabler, McDonald’s. Rather than allow a third-party to address a problem Taylor obviously feels is more profitable to ignore, McDonald’s and its soft-serve machinery provider of choice colluded to lock Kytch out of the market.
Apparently, McDonald’s and Taylor believe this is an acceptable failure rate. (Screenshot taken at 11:00 am CST, March 6, 2022.)
Nearly 13% of the machines in the nation are down. And that percentage is likely on the low side. The rate is much higher in major cities where a higher number of customers means more accurate reporting of machine downtime. Unbelievably, this 13% is likely an undercount, what with less-populated areas having yet to discover the machine is down and/or report it. And it’s unlikely many people is time zones further west are seeking ice cream at 9 or 10 in the morning.
The first lawsuit filed by Kytch, which targeted alleged Taylor wrongdoing, has given the company access to a large number of internal communications between McDonald’s and the soft-serve machine maker. And those communications have indicated McDonald’s is at least just as culpable in Kytch’s ejection from the market as Taylor is. In fact, it’s beginning to look like McDonald’s did more to lock Kytch out than Taylor did.
Kytch’s cofounders have hinted that they intended to use the discovery process in their lawsuit against Taylor to dig up evidence for a suit against McDonald’s too. In fact, the 800 pages of internal Taylor emails and presentations that Kytch has so far obtained in discovery show that it was McDonald’s, not Taylor, that at many points led the effort to study and develop a response to Kytch in 2020. In February of that year, Taylor president Jeremy Dobrowolski wrote in an email that “McDonald’s is all hot and heavy about this,” referring to Kytch’s growing adoption. A McDonald’s executive later asked for a conference call with Taylor in June of that year to discuss Kytch. When McDonald’s shared with Taylor a draft of the Kytch-killing email it planned to send franchisees, a Taylor executive commented to a colleague that “I am a bit in shock they are willing to take such a strong position.”
This is how the lawsuit [PDF] details just a small portion of the allegations against McDonald’s:
Kytch was the only product on the market that was positioned to fix the soft-serve machines at McDonald’s. Kytch soon gained market dominance after the largest organization of independent McDonald’s operators—the National Owners Association (“NOA”)—endorsed Kytch at its national conference.
McDonald’s took note and met with Taylor after the endorsement. According to Taylor’s internal emails, “McDonald’s [was] putting all of their eggs in this basket to fight Kytch” because “[t]hey have nothing else ready from their own IT Team.”
In the days that followed, McDonald’s Director of Equipment, Mike Zagorski, directed that “[t]hings need to go much faster” with Taylor’s Open Kitchen development, which was moving at a “turtle[’]s pace.” McDonald’s also warned Taylor that independent restaurant operators were demanding that McDonald’s integrate Kytch into the McDonald’s system. This threatened to undermine Taylor’s longstanding service and repair racket that the new Open Kitchen device was being designed to protect. McDonald’s and Taylor needed to buy more time to get Open Kitchen to the market.
To that end, McDonald’s and Taylor worked together to create a stall tactic. Together they fabricated bogus “safety” claims to mislead Kytch’s customers into believing that safety testing determined that the Kytch Solution would cause “serious human injury” to users—claims that are, and that McDonald’s and Taylor both knew at the time to be, demonstrably false.
Emails sent franchisees from McDonald’s corporate offices stated two things: Taylor was coming up with its own version of Kytch (a “strategic connectivity solution” that would “allow operators to receive text notifications” when their machines went down and “provide data on products dispensed”) and that franchise owners using Kytch would “completely void any existing OEM equipment warranty.”
The email also claimed — literally unbelievably — that Kytch devices allowed devices to keep running even when opened for cleaning and repair, which could lead to employees being injured. Kytch calls bullshit on this claim, which its refers to as disparagement and defamation of the upstart company.
[F]ar from being comparatively more dangerous than Taylor’s competing device, the Kytch Solution integrates (and is constrained by) the softserve machines’ safety mechanisms. For example, when the freezer door is removed exposing interior parts of the machine that might create a safety risk, a magnetic interlock system disables motor function to protect the operator from injury, and Kytch cannot operate the machine remotely. Thus, while Kytch does have the ability to remotely control the machine, it is limited by Taylor’s existing control mechanisms—including this magnetic interlock system—to ensure safety.
The lawsuit alleged McDonald’s deliberately misled franchisees to ensure Taylor’s market dominance. How locking itself into a single provider directly benefits McDonald’s isn’t entirely clear. But it clearly benefits Taylor. According to the lawsuit, service contracts account for 25% of Taylor’s annual revenue. Whatever the reasons for McDonald’s actions, its desire to eliminate Kytch prompted it to make seemingly false claims about the safety of the device. Worse, its actions have forced franchisees to throw money away on service contracts with a company whose machines are so unreliable they’ve become the source of McDonald’s corporate punchlines. And that makes this lock-in look more like extortion than a mutually beneficial relationship between franchisees and the corporation overseeing them.