May 17, 2015

Could McDonald's USA Run Out of Operators?

There will be an interesting confluence of events over the next few years that could strain 
the domestic Operator community.

To a McDonald‘s Operator attending a turnaround summit or worldwide convention it

probably seems like the number of Operators is infinite, but it’s not. And the number of 
expandable Operators has been reduced due to financial pressures and will be further 
reduced by corporate bullying.

In the near future expandable Operators will be needed for:


* Buying stores from Operators who are being forced out of the system.
 

* Buying McOpCos as part of the “refranchising” effort.
 

* Buying stores from Operators who are not being rewritten.
 

The rewrite issue could be a big deal. McDonald’s veterans will remember an initiative 
from the late 1990s called the “Convenience Strategy”. In the 1970s and 1980s McDonald’s USA opened about 300 stores a year. In the early 1990s the number slowed to 160-170 a 
year. To impress investors management tried to accelerate the growth of new stores by a 
factor of three in years '96, '97, & '98.
 

Not all of those stores exist today, some were SPODs that have been closed as well as some conventional stores. And some have already been rewritten for other reasons. But, it’s easy 
to assume that the number of rewrites up for consideration is going to double or triple in 
the last half of this decade.

It’s also easy to assume that, due to expandability issues, there will more than the normal number of rewrite denials. In most cases a pending denial of rewrite causes the Operator to 

sell the store before the end of the term (or they sell all of their stores).

And a potential shortage of McDonald's Operators won't be solved by recruiting new 
Operators because McDonald's is in the business of reducing the number of Operators,
not adding new people.

There are some multiple Operators reading this and rubbing their hands together thinking “Goody, more stores for me”. Be careful what you wish for because that’s exactly what many Operators did 20 years ago when they heard about the upcoming "Convenience Strategy".
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16 comments:

Anonymous said...

When this process begins MCD will have to make some hard decisions about financial and equity requirements. Many relocations and rebuilds have wiped out a lot of operator equity that was replaced with debt. During MCD's obsession with "market share" many stores were built that will never be profitable. Nobody wants to buy those stores. It is rumored today that so many stores being opened are underperforming due to poor real estate decisions and unrealistic sales projections not being achieved. Gone are the days when a new MCD restaurant was an automatic "home run". In addition, operator credit from the banks is running out. All of this taken together will create difficult issues and reduce the value of many stores. If the operators hold to making good financial decisions it will change the relationship. MCD could always dust off the old "BFL" program and bring in employee's.

Richard Adams said...

The BFL program has helped a lot of great people get their start in McDonald's but it wouldn't fit the corporate goals these days. BFLs use corporate capital and that money has to go to shareholders. Plus, they end up with a marginal Operator who might need financial assistance. There's no money for that. Are there a lot of corporate people who want to be Operators? Do today's corporate people know how to run stores?

Anonymous said...

Agreed, the BFL is really not an option. I have heard that nearly 50% of the operators are on the cusp of being ineligible for growth and rewrite using the current financial metrics. If true that cuts in half the numbers of operators available for MCD to work with. It may be that MCD will need to approve a ten year term for financing and reinvestments to create cash flow for the operator and credit approval from the banks. Either way buying out ineligible operators will most certainly require reinvestment, rebuild or relocation as a condition of the purchase. Those costs coupled with today's rent structure will put a lot of financial pressure on those operators. If we get sales up and there is a bad ression next year causing some competitors to fall opportunity could be good for the right deals.

Anonymous said...

McDonalds strategist have already thought this thru. That is why RDM is in place and Managers are invited at every level of meetings. That is truly their only pull. The appeal is not there as it was in the past. I mean this respectfully they need less astute operators to deal with their constant changes. Good people would run from the economics we deal with. The ship has so many small holes to fit, it does not look good and might be a tragic as the Titanic. This is not 2001. Consumers have shifted. We are not top of mind anymore.

Anonymous said...

There is an additional hole in the finanacial bucket. That is the so called bonus deprecation. With all most everyone having done some sort of MRP or rebuild over the last few years the tax man has be pushed back. However now that has run it's course. More and more operators are getting surprised by Larger and larger tax bills. It has given many a false since of equity dollars that is simply not there.

Once the Tax man is paid out of the business equity there is a lowering of the ratios that will make many more operators ineligible for growth or rewrite.

Coupled that with Obama care, rising wages & falling sales all are unsatainable scenarios. You can not raise prices quickly enough or cut waste fast enough to stop the erosion of equity.

Anonymous said...

All good and valid comments regarding the lack of a new operator pool; people with financialresources,awareness,business and financial acumen.

Another problem that is going to be encountered is the refranchised MCOPCO restaurants are going to be saddled with enormous repair/relo costs, not to mention the inherited company wage structure.

It scares me!

Anonymous said...

After your last business review, if you're ineligible for growth and rewrite due to your financial metrics, and you want to rebuild/remodel the store or add/replace equipment, you will not be able to get a loan from most national lenders. From personal experience, your lender will be notified by the regional controller's office, as part of the loan approval process, that you are "not eligible".

Anonymous said...

By the way, best of luck to the Los Angeles operators. Your city just raised the minimum wage to $15/hr. by 2020; that's $6/hour over five years. Get ready everyone...it's coming to your town, too.

Richard Adams said...

Not every town - just the big cities run by Democrats.

Anonymous said...

George W. Bush signed the last Federal minimum wage increase from $5.25 to $7.25. Democrats and Republicans both do it. This push to $15 will eventually spread to other liberal cities/states. Since most McDonald's are located in large metropolitan areas run by mostly liberal politicians, the impact will be felt throughout the system. Eventually the Federal minimum wage will be substantially increased due to political pressure from both sides.

Anonymous said...

Wow! What a bunch of glass half full comments! I have been in the system over 30 years - and it never ceases to amaze me the amount of Operators that make poor decisions when buying and selling, and then blame the system. If you buy right, like any investment, run a good store, look after your people, then you will do well. Of course there are always challenges and changes. That happens in all jobs - it's how we deal with them and adapt is what matters. If we stick together, we are a powerful group. Just make sure you pick the best leaders!

Anonymous said...

These are much different times unlike anything McDonalds has ever seen before!!

Anonymous said...

Best of luck to you all from someone who bought low over 40 years ago and sold high !! Thank god I'm out because I would be having a heart attack right now !!

Richard Adams said...

"Pick the best leaders"? When did McDonald's become a democracy? As many have pointed out here the important thing to do is to do what's right for your business, not just going along with the group-think.

Anonymous said...

I wish I bought over 30 or 40 years ago like some of you. I have no regrets today other than its tough to increase my equity level when every year or so re-investment or remodel brings my debt soaring and equity down. Sure, we enjoy the pay cheques while we work, but lets face it MCD's always gets paid more.

Anonymous said...

You can't always do what's RIGHT for your business as long as McD and leadership is involved in the mix. They ARE groupthink!