McDonald's Corp.'s Turnaround Plans are Leaving Behind a Key Constituency

By Markets Fool.com

It seems likeMcDonald's Corp. left out an important partner in its mission to bring back the luster on the Golden Arches.

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Franchisees are crying foul following a "Turnaround Summit" in Las Vegas hosted by new CEO Steve Easterbrook. They shared their disenchantment in a recent survey carried out by Janney Capital Markets. One franchisee said, "I came away from the summit completely confused. McDonald's management does not know what we want to be."Another called relations between McDonald's and its franchise partners "The worst I've ever seen!" while others said the suits at headquarters "still don't get it."

On a scale of 1 to 5, franchisees rated the event a 1.48, an all-time low. They complained in particular about McDonald's plans to roll out the Create Your Taste platform, which will offer patrons customizable burgers with a wide variety of ingredients, as well as the recent decision to raise wages at company-owned stores.

Source: McDonald's website

Easterbrook stepped into the executive chair on March 1 and has implemented a number of important changes in a short period of time. He first announced that McDonald's would move to ban the use of human antibiotics in the chicken it served. Next, he announced that McDonald's would test serving all-day breakfast in hopes of rolling it out nationwide.

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Both decisions were greeted warmly by the public, especially the prospect of all-day breakfast, which McDonald's loyalists have wanted for years.

Finally, Easterbrook announced a plan to lift all employee wages at company-owned stores to at least a dollar above the local minimum wage, starting in July. Some pundits criticized the decision, saying it didn't go far enough -- many fast food workers are demanding $15/hour -- but it's clearly a step in the right direction for front-line employees, and should improve customer service at those stores.

It's not easy being the big cheese
Easterbrook's decisions all seem like steps in the right direction, as the company he inherited was foundering. Comparable sales fell 1% globally last year and 2.2% in the U.S. due to operational snags, changing tastes, and competition from the likes ofChipotle Mexican Grill.

The sales decline at home came as the U.S economy had its strongest year since the recession and lower gas prices freed up more discretionary income for middle-class consumers. For the first time ever, spending on restaurants surpassed spending on groceries, a sign of the improving economic picture and changing consumer patterns.

Against that backdrop, McDonald's sales should be cruising higher. Instead, they're falling.

Unfortunately for Easterbrook, the franchisees, who own more than 80% of McDonald's restaurants globally and 90% domestically, may be his most important stakeholder group. Their cooperation and support is essential for any of his turnaround programs to be successful. They are also knowledgeable partners, and their opinions matter.

In the recent past, an ever-increasing menu and the necessary expenditures to accommodate additions like the McCafe line had bothered many franchisees. Now, they are saying they feel betrayed by McDonald's decision to raise wages for its own workers without giving them any warning.Many say they are unable to afford such a pay hike, as they have costs including royalties and rents to pay to headquarters, as high as 12% of sales, that don't apply to the company-owned stores.

What's next
Franchisees saved most of their wrath for the Create Your Taste program, however. The customizable burger platform was tested successfully in Australia, and McDonald's said it would offer the new menu in 2,000 of its 14,000 U.S. locations by the end of this year.

Franchisees have balked at the idea, however, which will cost them between $120,000 and $160,000 per restaurant in new equipment, such as kiosks and kitchen alterations. And it won't even be available for drive-thru customers, where the majority of sales originate!

One franchisee summed up his feelings, saying, "The ideas presented -- such as Create Your Taste -- DO NOT fit our business model. McDonald's Corp. has panicked and jumped the shark. The problem is an unwieldy menu -- too big -- and trying to be all things to all people." The comment resonated with other franchisees, who have complained that the company's bloated menu has slowed down service. Given the fact that McDonald's has staked its brand on speed and automation, not customization, it seems like a sensible argument.

The success of chains like Five Guys and Chipotle, which offer customers a choice of toppings, have led some to believe that customization is the key to connecting with millennials. But more important than that, both companies offer higher-quality food than McDonald's.

Five Guys even asks its customers to wait up to 8 minutes for its burgers, which are all made to order. McDonald's would never consider such a trade-off, and it therefore may be making a mistake by pushing the Create Your Taste program on franchisees.

The special menu is only available in a handful of restaurants in the U.S. currently, but it's been well received.If it proves to be a hit with customers, the program will be here to stay, but the franchisees' frustration deserves attention.

Rather than copying a rival's business model, McDonald's may be better off improving food quality, through changes like the ban on antibioitics in chicken, and reinforcing its strengths, like the all-day breakfast idea. As the above franchisee notes -- and as the success of companies like Chipotle and Five Guys shows -- you can't be all things to all people.

The article McDonald's Corp.'s Turnaround Plans are Leaving Behind a Key Constituency originally appeared on Fool.com.

Jeremy Bowman owns shares of Chipotle Mexican Grill. The Motley Fool recommends Chipotle Mexican Grill and McDonald's. The Motley Fool owns shares of Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.