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,
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,
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.