McDonald's Corporation turned in its eagerly anticipated turnaround plan earlier this week, but the market was unimpressed. Shares fell 2% on an up day for the broad market, and rival burger stocks soared.
In his presentation, CEO Steve Easterbrook focused on three things:
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First, he promised an organizational restructuring. Traditionally, McDonald's has been organized around regions with the U.S., Europe, and APMEA (Asia-Pacific, Middle East, Africa) forming the three core regions.
Now, the company will be organized around market maturity. The U.S will remain its own segment. Next will follow International Lead markets, which include countries with developed McDonald's systems such as the U.K., Australia, and Germany. After that will come High-Growth markets, which include countries with more potential like South Korea, Russia, and Spain. Finally, the remaining countries in the McDonald's universe will be filed under Foundational markets. Easterbrook believes this system will cut costs by eliminating bureaucracy and streamline operations by facilitating the sharing of ideas between markets that are in similar situations.
The next key pillar in the plan is increased refranchising. The company said it now intends to sell 3,500 company-owned stores back to franchisees by 2018, more than the previously announced 1,500. That will bring the percentage of franchised stores up to 90% from 81% where it sits today. Easterbrook stressed that increased franchising would provide more stable cash flow and revenue, and allow the company to cut $300 million in general & administrative expenses.
Refranchising has been popular with rivals such as Burger King andWendy'sin recent years, but the proposal comes at an odd time when many U.S. franchisees have lost faith in the brand and overall business. Easterbrook stressed the success of the franchising model for McDonald's in the past, but the structure is not unique to Mickey D's. Refranchising alone will not turnaround sales, especially as it will only affect about 10% of stores.
Finally, Easterbrook said the company aims to return $8 to $9 billion in capital to shareholders this year, and close to $20 billion by 2016, a move sure to please shareholders.
The key word we didn't hearEasterbrook's announcement was almost entirely focused on the structure of the business -- the operational segments, and franchising -- but the biggest issue facing the business today is declining sales. Same-store sales have consistently fallen over the last year and are down six quarters in a row in the U.S.
Investors were hoping to hear a plan to jump-start sales growth on the call, but there was little discussion of that. Management barely discussed the menu or the food despite recent news items that the company is making efforts to offer more customizable items.
Easterbook is clearly focused on improving the menu, having already announced that the company will ban antibiotics in chicken and is also taking steps to improve service with a wage increase, but investors wanted to see evidence of a menu overhaul or a headline item that would drive increased sales.
A modern, progressive burger companyEasterbrook and his team know what they want McDonald's to become, stressing repeatedly their desire to be "a modern, progressive burger company." But investors don't know what that means, and the company lost the opportunity to provide further detail on that mission this week.
McDonald's seems to want to copy the success ofChipotleand other fast casual chains that offer customers choice, but Mickey D's has its own internal obstacles to deal with first. Franchisees have long complained of an overextended menu, chafing at a long line of equipment purchases, such as the McCafe system, that haven't yielded the results promised. Not only does McDonald's have to win over the franchisees, but management may be wise to heed their advice. With the bloated menu has come slower service times and operational headaches, which have turned off customers and squeezed sales.
McDonald's still has to make the big decision about what kind of modern, progressive burger company it wants to be. That journey will involve trade-offs. What will the menu look like? Will the price point go up? It's easy to want to offer customers quality and choice, but that will add costs to the product, and could lead the company away from its traditional customer base looking to spend $5 or less on a meal. How does management reconcile those differences?
Until investors know the answer to those questions, it's hard to have faith in the turnaround. Without improved performance, which Easterbrook said wouldn't come until the second half of the year at the earliest, or a convincing plan to boost sales, the stock price is likely to remain mired under the $100 mark, as it's been since 2012.
The article The Big Thing Missing From McDonald's Corporation's Turnaround Plan originally appeared on Fool.com.
Jeremy Bowman owns shares of Apple and Chipotle Mexican Grill. The Motley Fool recommends Apple, Chipotle Mexican Grill, and McDonald's. The Motley Fool owns shares of Apple and 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.
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