Analyst Insight: McFlurried

Analyst Insight: McFlurried

🎧 Too busy to read this long-form piece of excellence? Why not listen to it on the go using our new audio feature in the MyWallSt mobile app. 🎧

This is an updated version of a story we first reported in April, 2021. 

It's a tale as old as time. You start thinking about a hot fudge sundae or a McFlurry, maybe a cone, and you decide you'll make your way to your local McDonald’s. You've had a good week, you deserve a treat. You navigate your way to the Drive-Thru and are greeted by that all-too-familiar, tinny voice that is simultaneously too loud while also being completely indiscernible. You assume they asked you what you want, you respond: "Just an Oreo McFlurry". The next words will crush you. "Sorry, the ice cream machine is broken". Your dreams are dashed.

At any one time in the United States, approximately 15% of McDonald’s’ ice cream machines are broken. If you don't believe me, take a look at McBroken, a live map that tracks the status of every machine in the country. This is an inconceivable statistic for the world's largest fast-food chain and is a considerable anomaly amongst the average failure rates of kitchen appliances. So, what the hell is going on?

 

Something is Rotten in the State of ‘Donald’s 

McDonald's standard ice cream machine is the C602, which is manufactured by a company called Taylor, which is owned by the Middleby Corporation. Taylor and McDonald’s have enjoyed a partnership for several decades and this model is a requirement for all franchise locations —the machine was picked out by the corporate office. 

This is an important detail to keep in mind. See, unlike Chipotle, which owns all of its locations, McDonald’s expanded through franchising, meaning each location is owned and operated by independent franchisees. In exchange for the rights to use McDonald’s branding and menu, a franchisee agrees to align with specific standards and practices set down by corporate. This includes everything from uniforms to the location of the building. However, when it comes to kitchen equipment, the franchisee has some leeway, and McDonald’s will typically approve a few models from a few different brands. But this flexibility does not apply to ice cream machines. The only approved model is Taylor's C602. Therefore, every McDonald's franchisee has to buy one.

Maybe you're thinking: "Taylor must not be very good at making ice cream machines", but that would be incorrect. Taylor supplies ice cream machines to a bunch of fast-food chains, including Wendy's, Burger King, Chick-fil-a, and In-N-Out Burger, and none of them seem to be having this problem. It would appear that the C602 is the odd one out, so what's going on with this specific model?

It turns out most of the time the machine isn't broken, it's just desperately trying to clean itself. In order to keep the piping in the machine sanitary, once per day, it has to complete a cleaning cycle where it heats itself and the ice cream mixture up to 151 °F and then cools back down to freezing. This cycle takes about four hours and is usually completed overnight while the restaurant is closed. However, if for some reason the cycle can't be completed perfectly, the machine presents one of its hundred error codes and locks out all users. It can't be used again until it completes a full cleaning cycle.

Within the C602's manual, the vast majority of these error codes don't correspond to a specific issue, they just tell owners to contact a Taylor authorized service technician. It also discourages McDonald's employees from trying to fix the machine themselves by stating it will void their warranty. This means that franchisees all across the country spend thousands of dollars every year on Taylor-approved services. Worse still, many of these services are for easy-to-fix issues, the most common being too much ice cream mixture in the machine. 

By decreasing accessibility, Taylor has created a reliable stream of recurring revenue — service fees make up 25% of the company's overall income. In any other environment, Taylor would have to make their machine more user-friendly, but because McDonald's has granted them a huge monopoly, they are competition-less and have no reason to change their dubious ways. Additionally, the service fees are absorbed by franchisees, not the McDonald’s corporation, so the fast-food giant has no motivation to push Taylor for better quality. Instead, it would appear, McDonald’s is happy to allow one of its oldest partners to fleece its franchise owners.

That didn't seem right to Jeremy O’Sullivan and Melissa Nelson. After spending two years experiencing the trials and tribulations of owning a Taylor device, they decided enough was enough. The pair set out to crack the ice cream machine's secret codes and like Alan Turing during WWII, they succeeded. Soon they developed a device known as Kytch, which plugs into the back of the C602 and monitors its inner workings like a spy dropped behind enemy lines. The Kytch delivers data to an owner's phone, helping them improve efficiency while suggesting troubleshooting solutions.

However, it didn't take long for McDonald’s and Taylor to catch wind of Kytch. Soon, franchisees began to receive emails from corporate warning that Kytch breaches Taylor's "confidential information" and can even cause "serious human injury". Tim FitzGerald, chief executive of Taylor’s parent company the Middleby Corporation, claimed: “we’re not in business to put other companies out of business” but “the product had not been tested or validated working in conjunction with the food safety protocols of a Taylor machine.”

Taylor then went one step further and promised to bring out its own, approved version of the Kytch that will be manufactured by Powerhouse Dynamics. Conveniently, Powerhouse is also owned by the Middleby Corporation. So far, it would appear that this device is a simplified and unhelpful version of Kytch which would continue to lock owners out of the most common and cumbersome errors. 

 

An Even Colder War 

That’s where our story left off a year ago. We were at the beginning of a David and Goliath epic that was about to enter courtrooms across America. Kytch had been driven to the brink and was eager to pursue legal action to uncover the true nature of McDonald’s and Middleby’s relationship.

So, how is that going? 

It’s a mixed bag. 

Since the announcement of Taylor’s competing device, O’Sullivan and Nelson were convinced it was created using their IP. To this end, the pair have been diligently building a case. In April of 2021, they noticed Kytch orders originating from Taylor's legal offices and various executives. When they raised this with the manufacturer, Taylor stated it “does not possess, and has never possessed, a Kytch device” and “has no knowledge of anyone logging onto a Kytch.”

In response, Kytch filed a lawsuit and requested a temporary restraining order against Taylor in California. This forced Taylor’s COO Jim Minard to admit they were in possession of Kytch devices but claimed it was only to: 

“evaluate and assess its potential technology-related impacts upon our Soft Serve Machine—such as whether the radio frequency of the Kytch device would interfere with our software signal, or whether the Kytch device would drain the power source of our software  and/or cause it malfunction” 

In July, a judge granted Kytch’s temporary restraining order and told Taylor to return any and all of its Kytch devices within 24 hours. 

Even more revealing were the hundreds of emails that Taylor was forced to hand over during the discovery process. In them were several examples of the manufacturer attempting to collect information about Kytch’s device in order to imitate it. COO Minard asked a staffer to "please buy a [Kytch] kit and provide me a written evaluation on the hardware and software." 

Executives made direct references to Kytch’s features when speaking to engineers and designers. Kytch’s remote monitoring and text-message alerts are mentioned frequently by name. In one email, Minard goes so far as to provide screenshots of Kytch’s interface when asking for a more user-friendly layout. 

But most interesting of all, was what the emails revealed about McDonald’s intense interest in Kytch. A Taylor executive stated they were “in shock McDonald’s is willing to take such a strong position”. O’Sullivan and Nelson believe the Golden Arches even went so far as to tell other companies like Coca-Cola and Burger King not to work with Kytch. This derailed the start-up’s plans to create intuitive devices for a whole host of kitchen appliances. 

For the last several years, McDonald’s has argued its concern is grounded in safety for workers and consumers. The fast-food giant believes that Kytch’s remote connection could cause a machine to turn on while a staffer’s hand is inside it during servicing. However, Kytch has repeatedly pointed out that Taylor’s own manual tells owners to unplug the machine prior to any internal work. Meaning, there should be no way for an employee to be at risk while Kytch is in use. 

O’Sullivan and Nelson claim that McDonald’s should know this as Kytch released a memo highlighting this fact to franchisees in 2019. Franchisees then passed this memo to McDonald’s corporate office. Kytch has also been certified to meet Underwriter's Laboratory safety standards and was thoroughly tested by an independent firm. 

 

McFederal Lawsuit  

Beyond concerns of safety, it is unclear why McDonald’s would be so opposed to Kytch. It fixes a longstanding problem that consumers and franchisees hate and has become a notorious online meme. Surely, selling more ice cream is in McDonald’s favor? 

Well, we may soon find out. 

Thanks to the documents Kytch unearthed during its initial lawsuit against Taylor, it has the material to sue McDonald’s. And that it did. 

Two weeks ago Kytch filed a federal lawsuit against McDonald’s in Delaware to the tune of $900 million for libel and IP theft. So far, things haven’t gone well. A judge denied the company’s request for an injunction against Taylor, stating there was no evidence Taylor’s system “was built with or incorporates any Kytch trade secret.”

Despite this, I’m excited to see what other secrets emerge during this process. Does McDonald’s get a chunk of Taylor’s recurring revenue? Is there a longstanding blood oath between the companies’ CEOs? Does McDonald’s make more money when the machines are broken? 

I can’t wait to find out. 

Anne MarieAnne Marie

Sign up for free to continue reading.