McDonald's to Shed More Restaurants in Bid to Revive Business

By Markets Fool.com

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One of the changes you'll see from McDonald's is who actually owns the restaurants as the burger shop refranchises thousands of company-owned locations.

One of the very few concrete plans that came out of McDonald's big turnaround reveal Monday was the proposal to accelerate the refranchising of stores, from the current level of 1,500 by the end of 2016 to 3,500 by the end of 2018.

Refranchising, or the selling of company-owned restaurants to entrepreneurs to operate as independently owned franchised businesses, would take McDonald's from its current level of being 81% franchised to around 90%.

Like much of the other ideas CEO Steve Easterbrook presented, however, the refranchising idea was viewed as another missed opportunity.

A restaurant operator, not a real estate magnate
Earlier this year hedge fund Glenview Capital Management suggested a more radical course of action. The McDonald's shareholder said rather than own the property and buildings, the sprawling, 36,000-restaurant chain should create a real estate investment trust to house them. It's an idea that is becoming more popular in the industry these days.

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Darden Restaurants , which owns roughly 1,500 restaurants in the U.S., is actively considering forming a REIT for its properties as a result of pressure that's been applied by activist investors who ended up winning seats on its board of directors after a protracted proxy fight. Bob Evans Farms may similarly be exploring a REIT structure after disappointing investors when it said it would not sell or spinoff its BEF Foods packaged foods division.

Creating a REIT is not a new idea when it comes to McDonald's. Hedge-fund operator Bill Ackman of Pershing Square has suggested the restaurateur form a REIT and the company says that over the years it has considered the idea, but has rejected it each time because it's not in the best interests of shareholders or the company.

One of the big changes Restaurant Brands International made was converting itself into a virtually wholly franchisee-owned operation.

Real estate was seen as a game-changing opportunity
Yet with the newly installed CEO seemingly promisingsome radical proposals to alter McDonald's course, there was speculation the chain might offer up a REIT as a solution, or at the least a dramatic increase in the number of stores that would be refranchised.

Both Restaurant Brands International , the parent of Burger King, and Wendy's are far ahead of McDonald's when it comes to shedding company-owned stores.

During 2011 Restaurant Brands entered into hurry-up mode with refranchising plans and completed its transformation in 2013. Today, the burger joint is 99.6% franchisee-owned with the company operating just 52 restaurants out 14,300 in 100 countries.

Wendy's has 6,515 restaurants, of which it owns and operates 957 of them, or just 15% of the total. However, it is also racing forward with its plan to reduce that to just 5% by the middle of next year.

In contrast, as of December, McDonald's has 36,258 restaurants in 119 countries, 6,714 of which it operated. A year ago it said it would refranchise 1,500 stores between 2014-2016, but the new, accelerated schedule unveiled by CEO Easterbrook, boosts that number to 3,500 restaurants, but also extends the time frame out by two years.

Because franchised stores are typically more profitable because the parent company bears less of the cost of operating them, McDonald's, by committing to still owning 10% of its restaurants, will keep those higher expenses on the books.

Maybe it's a recognition of how fraught relations are with franchisees that kept McDonald's from being more aggressive.

Whether changing the ownership structure of McDonald's alone will alter the downward path it's on is doubtful.

Dissension in the ranks
The restaurant owners have anecdotally reported strained relations with the corporate headquarters in Oakbrook, Illinois as they chafed under an ever-changing menu that cost them a lot of money to implement. Despite promises to streamline the menu -- it recently said it would cut a handful of items from a rather extensive list -- it continuously adds new ideas. It just announced the addition of sirloin burgers to the menu.

And the new Create Your Taste personalized menu that was introduced last year left them with a poor taste in their mouths because it didn't move the needle on sales, but would cost them hundreds of thousands of dollars to implement.

They also felt abandoned when Easterbrook announced he would be raising wages for employees at company-owned restaurants as they'll now be pressured to follow suit and squeeze their already thin margins further.

Last month franchisees came away from a powwow with Easterbrook apparently disillusioned by what they heard. According to a survey taken by Janney Capital Markets analyst Mark Kalinowski, franchisees' outlook on the company was the worst it's ever been in the 11-year history of the survey.

It may be finding enough successful, happy franchisees to take on the large financial burden of buying company-owned stores was more than it was able to do currently. So what McDonald's has been left with -- and investors too -- is a company not aiming for the stars with ambitious plans, but incremental ideas that seem hardly able to move the needle.

McDonald's had a chance to go big with its turnaround. Instead, it chose to go home.

The article McDonald's to Shed More Restaurants in Bid to Revive Business originally appeared on Fool.com.

Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Apple and McDonald's. The Motley Fool owns shares of Apple and Bob Evans Farms. 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.