The Wall Street Journal profiles McDonald's Chief Financial Officer. An analyst is quoted, "Bensen “has to be the voice of reason,” said Andy Barish, managing director of equity research for Jefferies & Co. “There needs to be a little bit of balance and discipline” when it comes to pricing." This makes it sound like the CFO sets menu prices. While he's not supposed to be doing that he probably does have RMS on speed dial. The CFO Report - WSJ: .
A McDonald's Operator asks - "How are Operators planning to pass along costs to customers when the Affordable Healthcare Act kicks in?" In my humble opinion - in the short term - they can't. Quick Service Restaurant menu prices are already at the upper limits and speaking as your customer, we're just not going to take it anymore. Future increases are going to seriously damage guest counts. It's fine to ponder factors like Food Away From Home but because of the AHA and possible food shortages Operators are headed into the great unknown. Shareholders have enjoyed the fruits of food inflation in recent years and it appears that managements of QSR companies do not want franchisees or investors to see any challenges ahead. In particular, at McDonald's, the corporate folks are counting on a food inflation windfall to continue to indulge shareholders and to pay for MRPs. So McDonald's customers will be asked to pay $5.00 or $6.00 for a Big Mac to cover increased food costs, healthcare costs, and to help the Operator pay for remodeling their landlord's building? That's just not going to work. I'm suggesting McDonald's Operators do several things: * Don't count on food inflation when making plans for the future. Your customers will outsmart you and they'll certainly outsmart Oak Brook. * Back off on borrowing money. Even though interest rates are favorable you're in rough seas, there's a killer wave of unknown magnitude on the horizon, and Operators are willingly taking on water? * Do not let management use Operator "leadership" as a tool to rush you into taking on debt. * Take another look at our comments on the Dollar Menu. In a recent letter to fellow Operators a member of an RLC wrote, "Our finances are under pressure and will most likely continue to stay that way." The letter went on to encourage Operators to hurry and sign up for more MRPs! An obvious Oak Brook form letter but is this the kind of schizophrenic financial advice one gets for their McDonald's franchise fees? The challenges of 2013 and 2014 could not have been imagined five years ago and sticking to a corporate agenda developed a decade ago may do a lot harm. .
"But how many customers lured by ads for a $1 cheese-burger will shell out four
times that for an Angus burger? Lower prices won't help McDonald's franchisees
already struggling to preserve profits as food costs rise. This is the inherent tension
in the company's relationship with franchisees: McDonald's takes its money off the
top as a percentage of restaurant sales, while franchisees pocket what's left over
after paying all the expenses of running the restaurants."
Finally, some analysts who understand the Dollar Menu!
Kelter said he’s “skeptical” that hyping the Dollar Menu will turn around
same- store sales. "You’re training your consumer to want to spend less and you’re compounding
some margin pressures,” he said.
"Some investors complain that McDonald's and its franchisees are spending too much money to make their restaurants looks spiffy at a time when cash is hard to come by. But McDonald's said remodeled restaurants in the U.S. are seeing a 6% to 7% sales lift above their local markets after a year." Don Thompson addresses investor conference HERE .
NPD expert: “Weaning customers off deals is going to be very difficult,” Riggs said. “And they’re going to have high food inflation hitting after the first of the year. How they add value and drive traffic (in that environment) is going to be a real challenge.” From Restaurant Finance Monitor
He's right there are not many bankruptcies in McDonald's but that's more about the way the franchise agreement is written than anything to do with financial solvency. We don't give legal advice here but we have talked to more than a few McDonald's Operators who made the decision to file for bankruptcy. We can report that nearly every one of those Operators (former Operators) found it to be a huge mistake. Based on these discussions we can make a few basic recommendations. If you or any McDonald's Operator you know is considering this as a strategy: * Read and re-read your franchise agreement. * Reread your franchise disclosures. * Obtain multiple legal opinions from multiple sources. * Explore ALL other options with your advisers. * Do not expect to have any control or influence over the court or the process. * Do not expect to embarrass McDonald's Corporation. .
On October 23, 2012 Don Thompson exercised (bought) 42,300 shares of
McDonald's at $35.25 - $39.5 per share for an approximate price of $1,581,0002. He immediately sold those shares at
$87.56 per share or a total value of $3,703.788.00 A few days earlier McDonald's VP Jan Fields exercised her option on 26,400 shares at $35.25 per share and immediately sold a total of 50,090 shares for a value of $4,439,977.
Crain's Chicago Business is running an article pointing out the problem with food inflation and maintaining the $1.00 price point. At this time the link is for subscribers but we'll post one when available. Meanwhile enjoy a couple of quotes from the article:
"The more you focus on value, the more difficult it is to raise prices on premium products, " Mr. Spieser says. (Mitch Spieser is an analyst at Buckingham Research)
"Franchisees overwhelmingly support the Dollar Menu, which they helped create", says Heather Oldani, McDonald's senior director of U.S. communications. .
There's been a lot of discussion in the press about Oak Brook's plan to
re-emphasize the Dollar Menu and "Value". We've expected a lot of discounting to
overcome the warm weather comps from the winter of 2011/2012 and have joked with
analysts about seeing the Big Mac on the Dollar Menu. But, listening to Don
Thompson's comments and reading analyst's notes, maybe that's not all that funny.
After all, the Dollar Menu was launched in 2002 with the Big N' Tasty as the
"And this summer, a Big Mac cost $4.33 on average in the U.S., up from $4.20 in January and $4.07 a year earlier, according to the popular Big Mac index compiled by the Economist. Those increases will continue, but at a faster pace." Really? when one can buy four or five $1.00 sandwiches for the price of a Big Mac? The L.A. Times Reports .
“As beef prices have risen and will continue to do so, many chain restaurants’ menu R&D efforts have shifted to chicken… as a way to offer innovation around a protein that is less expensive than burgers or other forms of beef,” Hayden says. Yes, the escalating cost of livestock feed will make chicken prices go up, too, but the increase won’t be as steep.
It was at least twenty years ago that our Co-Op saw a presentation from Oak Brook
"experts" who observed that over the years McDonald's benefited from an increase
in durable goods orders in the United States. Hedgeye Research just released a report
charting durable goods since 1997.
(Clicking on the chart brings up a larger and easier to read version)
Durable goods were generally positive in the late 1990s but McDonald's missed out on
that trend because of the cannibalization of the Convenience Strategy and the impact
of slow service times resulting from "Made For You". The increases beginning in 2003
are reported to be because of the "Plan to Win" but it looks like durable goods might also
have contributed to this success. Durable goods took a huge dip in 2009 and that was the
softest year out of the last ten for same store sales at McDonald's USA. I've made the case
that sales were poor in 2009 because McDonald's Operators wasted their advertising $$$
on espresso based drinks. But, there were strong economic headwinds.
While sales at McDonald's USA don't track perfectly with durable goods it's an interesting
metric to watch.
The entire purpose of the International Franchise Association is to defeat any Federal or State legislation that might give legal rights to franchisees. Of course, McDonald's Corp. is a major player in the IFA.
It's long been my position that one of the reasons McDonald's dominates
the QSR industry is that McDonald's Operators in the USA have a
relatively small number of restaurants in a defined geographic location.
The article below features a Burger King franchisee who owns 400 Burger
Kings spread between Dallas and Orlando, 50 Arby's and Popeye's in Texas
He also owns most of the CiCi's in Houston and 33 Golden Corrals.
How can a such a franchisee compete with a bunch of six store McDonald's Operators in his markets?
Good for him that he owns hundreds of restaurants but this is the reason
visits to Burger Kings are usually a disappointment.
"McDonald's has been intensifying its "messaging around value," noted Andy Barish, a Jefferies analyst. For example, he noted that the company ran promotions for its breakfast Dollar Menu in mid-August."
This chart from a recent Hedgeye note on McDonald's illustrates the hill that McDonald's
and other chains have to climb this winter. The blue is the past 12 months and the red is
an average of the past two years. Of course the highest increase was in February partially
created by a 29 day month. (For a larger picture click here) >>> Hedgeye Chart
We've posted an opinion piece concerning the development of new McDonald's
stores in the United States. At the top of our homepage, in the black bar below the
pretty picture, click on "Was McDonald's USA Saturated 15 Years Ago?" .
"The slide in output may not stop until 2016 or 2017, Rachel J. Johnson, a USDA livestock economist, wrote in an Aug. 16 report. Once the herd starts to expand, it takes more than two years to boost supplies, according to Ron Plain, a livestock economist at the University of Missouri. Calves have a nine- month gestation period and take about 20 months to reach slaughter weight, he said."
"McDonald's is increasingly positioning itself as the Wal-Mart of fast
food, using its unmatched power in raw material procurement and passing
on the scale advantage to customers by outpricing its competitors. This
might work against McDonald's to an extent, as customers learn to see
the company as very low-tier and move to better restaurants when the
times get better."
This article is about high-end steaks but contains a lot of good information about
the cattle market.
"Droughts often mean higher prices for prime meat a season or more later. Smaller herds
yield fewer calves, which take 14 to 18 months to reach slaughtering weight. The high
cattle prices that are expected to follow will make it hard for ranchers who walk away
now to return to cattle"
There are two reasons Burger King will not be a long term treat to McDonald's or even Wendy's. 1) The franchisees keep getting larger and larger, operating hundreds of restaurants spread over multiple states. 2) Burger King's investors are cutting the corporate side down to a husk. In five years we will no longer be talking about Burger King as a major QSR player.
I've come across a few friends who have not noticed one of our sub-pages titled
"The Real Franchise Stakeholders". Just click on that title in the black bar at the
top of this page. Let me know what you think!
"As you can see, the Big Mac maker's 20% net margin is more than three times the same figure for the restaurant industry and almost twice that of the average company on the Dow Jones Industrial Average"
"franchisees are looking at ways to avoid the requirement by cutting
schedules so they work fewer than 30 hours a week—the law's
definition of a
part-time worker —since only full-time workers are
counted toward the insurance
"A question for franchisees is whether the federal government will count
employees based on the combined number at all their outlets or
treat each outlet as
a separate business."
For several years, speaking as a customer, I've been commenting that McDonald's
food has gotten too expensive relative to the avalible value offerings. I know
there have been changes to the Dollar Menu but then offers like the $1.00 drink
come along. This summer I've enjoyed my $1.00 ice tea and an item or two off the
Dollar Menu. My average check is always $3.00 or less.
Time magazine is reporting on data from the NPD Group that says sales of larger
combo meals have decreased 12% over the past five years.
NPD restaurant industry analyst Bonnie Riggs says, “The number-one reason
they said they stopped is that the dollar menu is a better deal.” Customers who
used to buy combo meals but don’t anymore discovered that “you can ‘bundle’
from the value menu and it is a cheaper price.”
The point? As long as I can build a meal for $3.00 or $4.00 there's no way I'm
paying $6.00 or $7.00. The McDouble is an excellent sandwich and the McChicken
is a nice change of pace. I don't think I've had a Big Mac yet this year and I know
I haven't had a QPC - but on many occasions I've eaten two McDoubles.
Again, as a customer, I'll show up in many McDonald's restaurant's customer counts
but not at the bottom of the P&L.
This week saw further fallout from the strong winter 2011/2012 sales at McDonald's
USA. On Monday morning Oak Brook announced earnings for the second quarter
and revealed sales in the USA were up 3.9% for the 2nd Quarter and up 2.9% for
the month of June causing Nation's Restaurant News to report:
With same-store sales slowing sequentially from an 8.9-percent increase in the first quarter of 2012 to a 3.6-percent gain in the second quarter, McDonald’s would need to hit value harder in its domestic marketing, Thompson said.
But for the past several years sales increases in the USA of 3% or 4% have kept
investors quite happy and the share price hit historical highs. Because of Oak
Brook's lack of candor about how much the warm winter helped sales new
expectations have been set among investors and the media.
A word search of the earnings call transcript shows the word "Value" is used
over 60 times in a one hour discussion!
To be sure there were other issues with corporate earnings but this lack of under -
standing will become an even bigger problem during the winter of 2012/2013 when McDonald's USA will be up against those great numbers from last winter.
And yet McDonald's management refuses to warn investors that it's going to be
a cold winter no matter the reading on the thermometer.
For many years I've encouraged McDonald's franchisees to pay
attention to the quarterly conference calls between McDonald's
executives and Wall Street analysts. I don't think too many
took my advice.
But, today's call is significant because of the drought, foods costs
and competitive pressures. This call contains revealing comments
from management and some really interesting questions from the
If McDonald's Operators want a look into the next 18 months you really should read the transcript of today's call. Or, you can listen
to the playback on the investor section of the McDonald's website.
Some smart people quoted in this article. Howard Penney, managing director of investment research firm Hedgeye Risk Management says: “McDonald's can't ever go back to the Dollar Menu. It's permanently gone.”
When announcing "disaster" areas due to the drought USDA Secretary Tom Vilsack
said: "ranchers were most seriously affected and he expects the prices of beef, poultry and pork "may go down a bit, but over time they will rise."
In other words, restaurants may get some relief this summer but just about the time
the industry comes up against the tough comps caused by the warm weather of
winter 2011/2012 the corporate folks will be pushing for discounting and coupons to
keep same store sales from going negative.
In my humble opinion - in five years we will no longer be referring to Burger King
as a major player in the QSR industry. Here's the history of the "financial engineering"
that is destroying that company.