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The Problem with the McDonald’s Turnaround

On May 4th2015, McDonald's Corporation  announced initial steps in a turnaround plan which included the following activities – restructure the business into four segments, beginning July 1, 2015 – U.S., International Lead Markets, High Growth Markets, and Foundational Markets; refranchise 3,500 restaurants by the end of 2018; capture approximately $300 million in annual general & administrative expense savings; and, embark on a three-year return of cash program to shareholders totaling $18 to $20 billion.

Other than the announcement of a turnaround, there was no complete turnaround plan communicated, i.e. what happened to place you in this situation and what is your plan to get out of it.  At this point, all we have to go on is a collection of press articles and press releases.

The clearest sign that turnaround assistance is required is after a steady erosion of your business economics.  The turnaround at McDonald's Corporation is required based on the substantial economic drop in its business model, since 2013 –

As of

Revenues ($000)

Gross Profits ($000)

Profit Margin

12/31/2014

$27,441,300

$10,455,700

17.00%

12/31/2013

$28,105,700

$10,902,700

20.00%

12/31/2012

$27,567,000

$10,816,300

20.00%

12/31/2011

$27,006,000

$10,686,600

20.00%

http://www.nasdaq.com/symbol/mcd/financials?query=income-statement

A business may find itself in need of turnaround assistance based on unforeseen external factors.  There are many reasons why an organization may require turnaround assistance.  Rarely is it due to a single factor.  The primary impetus for the McDonald’s Corporation turnaround requirement seems to be associated with competition from new entrants to the market and shifting consumer preferences.

In any turnaround, transparency and communications are integral for investors, analysts, potential franchise owners, rating agencies and employees.  When the turnaround is transparent, interested parties understand your direction and the value of the changes being implemented.  But absent this information, confusion is a high probability.  Based on a review of openly available information – some of the action items slated for implementation seem to be contradictions.

Steam-line menu

Variations and food options impact the speed and efficiency of the restaurant kitchens.  Testing is underway in Delaware, Little Rock, Waco, Bakersfield, Macon and Knoxville to simplify the menu and reduce options.  However, in another article you may read about menu additions planned or being tested, including all day breakfast, burger customization, a premium sirloin burger, and a premium chicken sandwich.  As of 2014, McDonald's Corporation maintained 121 menu items.  Will the additions come before the reductions, further slowing down the restaurant kitchens?  What has the research shown with respect to the expected impact on customer satisfaction, from the menu reductions?

Return cash to shareholders

On the heels of the recent year-to-year decline in profits from 2013 to 2014, McDonald's Corporation intends to return $8 to $9 billion to shareholders in 2015.  At the same time, McDonald's will be embarking on a turnaround which requires the use of surplus cash up front, to design new processes and launch new products.  For example, a new 31 page procedure to improve order taking and fulfillment accuracy was implemented in a Wyoming franchise, beginning December 2013.  The change was implemented to reduce the time to service customers, and increase customer satisfaction.  Based on its success, training and roll-out is slated for the summer 2015.  The role out of this new process to all 36,000 locations will require an investment by the organization.

Recently, the rating on McDonald’s Corporation debt was lowered by the three big rating agencies – Fitch lowered its issuer default and senior unsecured rating to triple-B-plus from A; S&P lowered its corporate credit rating to A- from A; and Moody’s lowered its senior unsecured rating to A3 from A2.  As McDonald’s debt ratings decline, the cost of borrowing will increase for the corporation.

Data Distribution

A redesign to turnaround a business cannot be completed behind the scenes.  Progress sharing with your investors, analysts and employees is very important.  But beginning July 1, McDonald's Corporation will discontinue reporting sales figures monthly, and will begin to only report quarterly.  A turnaround usually results in a period of high analysis and the development of metrics to measure and manage the business.  Success at achieving your strategic goals, based on the metrics, is important to stakeholders.  Reducing the flow of information during a turnaround, may be counter productive to your efforts.

Once a Turnaround is announced, the focus should be on strategy, planning, cash flow, reporting, optimizing policies and procedures, marketing and business development.  However, currently McDonald's Corporation is experiencing an attack on its brand from several fronts.  These attacks can be distracting and damaging in the press, when interested parties do not have a full understanding of your intended direction.  Examples of two such issues include - a Legal proceeding to determine if McDonald’s Corporation shares some responsibility for the actions of franchise employees, with respect to low wages; and The Children’s Advertising Review Unit claimed that McDonald’s Corporation advertising placed an emphasis on the toy that was part of the Happy Meal vs. the food in the Happy Meal.

I believe that McDonald's Corporation would benefit if the turnaround plans were more fully communicated to investors, analysts, potential franchise owners, rating agencies and employees.

Comments

Chris Shumate
Title: Accounting Manager
Company: Dominion Development Group, LLC
LinkedIn Profile
(Accounting Manager, Dominion Development Group, LLC) |

Regis - Although some states have a higher minimum wage than the Federal minimum wage requires, what do you foresee happening to the McDonald's turnaround effort if the Federal minimum wage is increased to $15/hour?

I can't help but wonder how long it would take for the revenues to start rising to a sustainable level making up for the increased payroll. There are people who wouldn't pay the increased price initially, but would come around at the thought of convenience; however, there are others who would likely stay away altogether after the price increases.

Topic Expert
Regis Quirin
Title: Director of Finance
Company: Gibney Anthony & Flaherty LLP
LinkedIn Profile
(Director of Finance, Gibney Anthony & Flaherty LLP) |

I believe that McDonald's is a victim of it branding. The company is positioned as great tasting and inexpensive food. Where ever I go in the United States, I can purchase the same meal, with the safe quality. Most of us can repeat the ingredients in a Big Mac as that was a very powerful commercial, i.e. two all-beef patties, special sauce... That was part of its branding. The slogan did not end with "or feel free to change it up." Consistent quality, fast and at a low cost.

I do not think of McDonald's when I want healthy or organic or custom fare. Very few brands have ever had success at a quality transformation. The only transformation that comes to mind is "Made in Japan." That was not a positive in the 70's. But in the 80's, that all changed with the explosion of Japanese vehicles, i.e. Honda and Toyota. While it is not impossible, it is very expensive to re-brand.

Now to your question - If I cannot raise price, increasing my personnel costs will greatly change the business model economics. I do not know nor can I predict if this change will be large enough to keep potential franchise owners away.

You may see this iconic brand lose its importance in the US, but grow internationally.

Chris Shumate
Title: Accounting Manager
Company: Dominion Development Group, LLC
LinkedIn Profile
(Accounting Manager, Dominion Development Group, LLC) |

Excellent points.

Part of their turnaround efforts should also be focused on customer service too. According to a July 1, 2015 survey, McDonald's didn't make it into the Top 10 in customer service. The article states that McDonald's even saw a decline in its score.

Customer service helps with customer loyalty. As an example, Chick-fil-a has faced backlash over its owners social views, yet still ranked number one in customer service.

Customer loyalty brings in revenue. There again, customer service is only one aspect of a company's turnaround efforts. Much more is needed to ensure the viability of a company's long-term success.

USA Today article referenced: http://www.usatoday.com/story/money/2015/07/01/chick-fila--america-favorite-restaurant-mcdonalds-consumer-survey/29554303/

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