After struggling under former CEO Don Thompson and a rough few months for CEO Steve Easterbrook, things are starting to look up for mega burger purveyor McDonald's . More recently, the decision to bring all-day breakfast, along with rumors the company may spin off its U.S. holdings, has the stock sitting near one-year highs, with the vast majority of those gains in the last month alone.
So, naturally, you'd think franchisees would be sanguine by the sudden change of fortunes. After all, Thompson's reign was marked by continued strife between the restaurant system and the franchisees who own and operate most individual locations. A change of CEO should have buy-in from growth-focused franchisees.
Continue Reading Below
But that would be wrong. According to a survey from analyst firm Nomura Securities, by way of Business Insider, franchisees are more fearful than ever. According to one franchisee, the company is "in the throes of a deep depression."
Company reaction: Quit the businessAccording to the survey, franchisees are questioning McDonald's leadership and value positioning under its new CEO. Initiatives like all-day breakfast (rejected in the past for being incongruent with established workflows) and choose-your-own taste, make things complicated for a store model established for efficiency.
Interestingly enough, and in a bout of irony, franchisees appear to be receiving the "take it or leave it" approach many themselves have taken with their employees. According to one franchisee, the company's insinuated response to its franchisees taking the burden of these responsibilities is to "get out of the system" -- meaning quit the business. Meanwhile, McDonald's continues to execute its three-year cash return of $18 billion-$20 billion in a combination of dividends and share repurchases to shareholders.
Contrast this to, say, McDonald's founder Ray Kroc, who once compared his company to a "three-legged stool," with franchisees, suppliers, and employees supporting his corporate seat and presumably shareholders as well -- and it seems the seat is getting heavier while the three legs -- minimum-wage employees, squeezed suppliers, and now fearful franchisees -- are becoming even more bowed.
McDonald's franchisees are partially responsible for thisIn a weird way, franchisees are partially responsible for the situation they now find themselves in, as one franchisee in the Nomura survey estimates 30% of all franchisees are insolvent. For too long, they operated on a low-cost business model, with many doing what they could to keep employee costs as low as possible to deal with added demands/ingredients from corporate.
And while many were profitable, it was done so by paying employees a wage less than the cost of living, amid a workforce slowly shifting from teenagers to adults with increased living costs. In the end, there's only so long a company can pay below-market rates for any input -- at some point, the market will correct.
Furthermore, ruthlessly forcing down employee costs encouraged McDonald's -- and by extension, its franchisees -- to overbuild locations to further compete with each other, eerily similar to Starbucks' store glut before the Great Recession. But unlike Starbucks, which is essentially corporate-owned and closed stores to deal with decreased demand, McDonald's corporate has a much harder job closing its franchisee locations to deal with decreased demand.
Starbucks' moves proved incredibly adept; after returning back to the CEO position after a 50% drop in the share price, current CEO Howard Shultz has led the stock to a 500% gain since he reassumed the the chief executive role and eventually started to add new locations once demand returned. McDonald's can't be like Starbucks and will have to muddle-through this low-growth period unless operators exit the business.
Also unlike McDonald's, Starbucks does a better job of paying and providing benefits to employees -- this is now factored in their actual store-cost model, rather than a rosy model that assumes flat or extremely low-growth employee costs. For franchisees, they are now being pulled in one direction from employees (and a few municipalities) who want operators to pay more on a per-hour basis, corporate that's now asking more from their employees, and their own solvency.
If it's true that 30% of all operators are insolvent, look for McDonald's to continue to struggle operationally, in spite of the large cash return the company is undertaking.
The article Who's Not Lovin' McDonald's All-Day Breakfast? originally appeared on Fool.com.
Jamal Carnette has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Starbucks. 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.
Copyright 1995 - 2015 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.