Coalition of Franchisee Associations

November 21, 2014

Franchisors Tell Investors More Than Their Franchisees

We've always encouraged McDonald's Operators (and franchisees from any brand) to follow the
communications between corporate management and their investors and analysts who cover the
company. This usually takes the form of press releases and on-line conference calls following
the publication of a particular quarterly earnings report.

But presentations like the aforementioned Morgan Stanley Conference can be more instructive.
The end-of the-quarter conference calls are 80% about the past and 20% about the future. Investor conference presentations are almost entirely about the future. Since the future of McDonald's is in question it's important to study how management plans to reinvent the brand.

Especially since this reinvention of McDonald's is being orchestrated by executives who've never
run a real restaurant or come face to face with a real McDonald's customer.

Three things stand out of the McDonald's discussion at this conference:

* All of McDonald's problems will be solved through "Technology". Management says their digital
strategy will "revolutionize how the customer experiences us".

* Simplifying the menu and operation while adding customized products was discussed with no
serious discussion about real world conflicts this creates. Technology will take care of everything.

* Other than talk of selling some McOpCos there was no mention during these discussions of the
fact that McDonald's has franchisees. If a Wall Street analyst was new to the industry they might assume that every McDonald's was operated by McOpCo. Menu prices are discussed with no mention of franchisees. Vast technology investments are discussed with no mention of franchisee buy-in. Changes to the kitchen are discussed with no mention that those kitchens are owned by franchisees. 

Normally there is rhetoric such as "our franchisees are aligned with our plan" or some positive statement. This time it was as though McDonald's Operators don't exist. 


Anonymous said...

All of this is encouraging in that someone is thinking about the problems. Regardless, there are a lot of smart people in Oak Brook and Wall Street doing stupid things. MCD says they want to get closer to our customers. However, in order to do just that they need to get closer to their operators. They listen to their expensive consultants more than they do to their operators that interface with the customers everyday up close and personal. Bringing back former executives can be helpful but I think they would do better to bring back guys like Skinner and Roberts they really understand operations and the importance of alignment. The regions are in bad shape. In their zeal to grow market share they are buying expensive sites and overestimating sales by hundreds of thousands of dollars handicapping those stores for years to come. Some of these sites, its documented, will never be profitable for the company until after the first rewrite. Plus, it doesn't keep out our competitors. The company loss of credibility with the operators needs to be repaired but since MCD thinks they have superior knowledge it will be a slow process. If they want to be more profitable they should stop opening low volume high cost stores and close some stores that will never perform well. They need to admit that they have an army of people that just are not qualified to do the job. Its a shame. Forbes once wrote an article about America's biggest missed business opportunity by bad management that being Howard Johnson motels. Before them there was nobody in the Motel or fast food. But, they made bad decisions hired awful people and let Holiday Inn, Marrotte and others just take it away from them. There are good lessons there for MCD to consider.

Anonymous said...

They finally are admitting that the vast menu has killed our service times. It also makes it next to impossible for our crew in the kitchen, not to mention our people taking the orders in the Drive-thru and on the front counter.

Anonymous said...

Same old story, more and more costs get transferred or added to the operator’s side of the expenses. Some are new costs, and some are just increased fees from the Corporation such as 14% rents and higher,that they “let us” buy down to 11% for $700,000. Plus.

Anonymous said...

Corp. continuing in dictating price at a National (OPNAD) and local level They should not be in the price business especially after its been proven that corporate cant even run their own stores profitably. But of course there is no skin of their own in this game since all the cost associated with any idiotic promotion is all on the operator.

Anonymous said...

We must stop the madness of tearing apart or tearing down perfectly
good buildings. The owner/operators can't handle the debt since
there are little sales increase. A lot of people who have already done
the projects are going to be in trouble over the next year or two.

Anonymous said...

On relocations and rebuilds MCD is consistently missing sales and impact projections by large margins wiping out huge chuncks of operator net worth. This decling net worth and lower cash flow is a concern to MCD lenders. A possibility of a perfect storm of financially compromised operators more conservative lending, consistently poor management by MCD will soon be reflected in the stock price which is the real motive for MCD to react. Does the term BFL mean anything to anyone?

Richard Adams said...

I doubt that a Business Facility Lease (BFL) would apply since that's the opposite of where shareholders want to go.

The popular trend in the franchised restaurant business is "refranchising", selling most if not all of the company operated locations. It's stunning how few restaurant companies want to be in the restaurant business.

But a McDonald's BFL conversion would use corporate capital that shareholders expect to keep on their side of the equation. In the current climate I think we could expect that an Operator in trouble would be forced into a fire sale to a larger Operator. Or, McDonald's takes the store back and writes a new franchise to a large multiple Operator. Neither of those solutions uses any corporate capex leaving more cash to return to shareholders.

Anonymous said...

I agree that the BFL is not a practical solution. I do know that MCD lenders are getting nervous about making traditional loans. I also know that at least one large lender and I've been told that others have suggested to MCD a ten year note but MCD treasury is having none of it. MCD has suggested in retort a three or four month interest only but that the principle pymt be added to the last three or four months of the note. This would not extend the seven year term but allow a few months of breathing room for the operator to get through some rough times. In some cases this could mean twenty or thirty thousand dollars a month of additional cash flow for three months. MCD operators has been a very nice piece of business for the lenders and they want to keep it. They see first hand the stress building on the operators and want to salvage this business anyway possible. Recent data coming out of OPNAD indicates this slump could last through April. If true,there are operators in big trouble. Only about 50% of the operators are at a 5 on the financial health index with a 6 being expandable for growth. There are many that are at 4 or less. With 50% of the operators non-expandable from a financial condition this really handicaps the system and it is likely those in trouble will get worse off before things get any better. If MCD won't agree to a longer term and if they keep insisting on ineffective reinvestments it is up to the operators to dig in their heels. There was a time when the regions would set down with the operators and define and work through the issues but no more. The regions have lost so much credibility many operators don't trust what they say anyway.A solution is to regain sales and get debt under control.

Richard Adams said...

It depends on how the corporate people are looking at the Operator. Is the Operator an "asset" or a "liability"?

Are they thinking, "We must help this Operator survive so they can go forward and produce sales and
income for the company"?

Or, are they thinking, "We must limit the short term financial exposure for the company in this situation no matter what happens to the Operator"?

If the Operator is not considered an asset they are expendable, especially those with less than 5/6 stores.

Anonymous said...

The highest concern to all Operators and Corporate McDonalds should be the fact that you cant change the perception of a consumer who is going in the opposite direction (value vs. quality). This is extremely important to the Operator who is being weighed down with re-image debt, new initiative debt, and satisfy wall street debt to come as the consumers wont be there to support debt carried. I have said it before and I will say it again. If Wall Street knew the burden the Operators endure for this brand it would be EMBARASING and I am shocked it has not been exposed. McDonalds better take care of their Operators before the only people willing to invest in them will be the Managers that run them.

Richard Adams said...

"I am shocked it has not been exposed."

Only McDonald's Operators can do that job. Analysts and business reporters are desperate to hear the Operator's side of the business. They're always surprised when they first learn that these people who they regard as strong minded, sophisticated business people are so muzzled.

Richard Adams said...
This comment has been removed by the author.
Richard Adams said...

Re the number of McDonald's Operators who are expandable: that's a growth issue but it's
also a general franchise issue. If an Operator isn't eligible for expansion they are not supposed to
be rewritable. That might become a problem for the system because we are approaching the 20th
anniversary of the "Convenience Strategy".

A little history - for most of the 1970s and 1980s McDonald's USA opened about 300 stores a year.
In the late 1980s and early 1990s saturation became an issue and they throttled that number back to under 200. I believe 1991 was the low point at 160.

In 1994 management announced the "Convenience Strategy" and in 1995 opened 597 free standing stores and 533 SPODs. 1996 saw 542 new stores and 184 SPODs in the USA. By mid-1997 they slowed down but never admitted to any mistakes.

Now, there won't be that many rewrites because most of those SPODs are gone and some real tores have already been rewritten or closed. But, if we were to graph the next couple of years the number of stores being considered for rewrite would be a line going steeply north and the number of Operators qualified for a rewrite steeply declining.

It's difficult to hide from your mistakes, isn't it?

Anonymous said...

"I am shocked it has not been exposed"
Your are correct, however MOST Operators have become "numb" to sound business practices that don't work in the real world, in FEAR of a GM not considering them a team player. Like go into a million dollars of debt and get a second note to buy down rent. Right after you pay off your debt to a perfectly good building. That's what every small business dreams of the day that they pay off the debt to the business. You don't do that in the real world. Go to a traditional bank and sell that to them (Good Luck). I do think that more of Wall Street Analysts need to see this forum you have created for Operators to openly vent that provide FACTS about the Brand. I can tell you unequivocally I would not have purchased stores if I knew then what I know now. A book should be written called "The Golden Handcuffs", the story of a disillusioned young man who thought he was pursuing the wealth generated in the Ray Kroc Era. The Brand has taught us all how to be sounder business people, where it gets skewed is when they push agendas that don't have sound consideration to an Operators cashflow and personal uses for HIS equity NOT MCDONALDS equity as long as you maintain their ratios they require us to grow. GROW WHAT: An old store you over pay for that you have to bring to new standards and go into serious debt to do it. How does that remotely sound appealing!! One word: CHARADE

Anonymous said...

Can someone get an accurate breakdown of operators in each financial group.
More than 6, and less than 6. Lastly 6 right on. I know the numbers change monthly just looking to see how we stand.

I am at a 4.

Just did MRP In April sales up 1 percent. I was told if I ran it right I would achive 7-8 percent. Have been in business with McDonald's over 40 years, just 25 as the operator. I have the same management team before the remodel as I do today yet 1 percent increase. I am sure the regional manager thinks is my fault.

Anonymous said...

There are many mcd franchisees who took on a lot of debt to improve
MCD real estate and now they are waiting for MCD corp to come to
the rescue. They will probably wait too long and end up on the street.

Anonymous said...

The MCD system is looking at a possible very serious issue that could regulate MCD into a very average organization. There is time to reverse this trend. They talk about their deep bench of experienced executives and management systems that are respected on Wall Street and elsewhere. But, where are they and who are they. Decisions being made from the top down into the regions are terrible. The management people I've talked to don't know the difference between a good administrative decision and a good business decision. Clearly, other priorities take a higher importance than a good "business" decision. I've made it a point to talk to system CPA's, vendors, consultants, competitors, lenders all loyal to MCD. To a person they express disbelief at the decisions being made and agree that our problems are self inflected. If you want to look at a well run fast food company pull down information on "Steak & Shake" they are in business to make money for their shareholders, operators and they run pretty good operations. Look at their stock price. They make money I can tell you that much. First and foremost this is a business and needs to be run like a business we are not a government annex. MCD is on the wrong path!!

Richard Adams said...

This is why the rhetoric about moving decision making from Oak Brook into the field is so questionable(or maybe silly).
McDonald's has been a top-down bureaucracy for 30 years. So the corporate clones in the regions are supposed to turn on a dime and become creative entrepreneurs overnight? This is all about taking the spotlight off Don Thompson and the upper management team and buying them some time.

Anonymous said...

54% of the operators are at a 5 or below. Is what I was told by regional finance.

Anonymous said...

When I first purchased my corporate operated stores I was a 6 for first three years. I was wanting to expand but nothing in my area at the time. Then I was told to remodel increasing my then already debt load by 110%. From a 6 I went to a 3 and no longer expandable. I have been ridiculed by the bank, and threatened that my equity did not meet the covenants. Now New locations have opened and I have been declined due to financial equity. A word to the wise, make certain if you remodel you have equity, otherwise your on your own, and God help you. My Life has struggled for past three years and its not what I expected from the Golden Arches Business.

Richard Adams said...

McDonald's Operator equity is pretty far down the list of corporate priorities
and comes after returning cash to shareholders and pushing for same store
sales increases. Operators who adhere to all the corporate programs won't
have much equity, either as a going concern or at the time they sell and
leave the system.

Anonymous said...

Leadership now is asking for operators and their mid-management go go to Vegas and listen to our new direction. Happening in March.

Wonder how much this is going to cost in travel, meals, time and what we might have to buy now.

Maybe McOpCo is picking up the tab from service fees.
just kidding. Don't want to hurt the stock price.

If someone knows what the show is about (because it will be a well rehearsed show). Give us a heads up.

They think they can bring us all together, if we buy it this time we will buy it every time. What happened with face-to-face, play lands and ball pits, red roofs and the list goes on.
Lastly, leadership went to Europe for new restaurant building designs, what about the new buildings we just finished the past few years, not including the MRP's.

I read earlier more than 1/2 of the operators are below the threshold of the 6 rating. How will most of us survive in the years ahead. If you haven't checked lately the price of regular meat is over 100.00 a case, with no end in sight. I'M loving it!!!,


Richard Adams said...

The event in Vegas must be the beginning of Don Thompson's
"Aggressive Change". As we've written before, Aggressive Change is this century's version of Jack Greenberg's "Reinvention" in the late 1990s.

More info on Aggressive Change at the links below: