December 31, 2015

They Aren't Making McDonald's Real Estate Anymore

McDonald's investors and analysts have been salivating over the equity in McDonald's real estate portfolio for decades.

Many think that McDonald's should follow the lead of other companies and spin off their 
real estate assets into a real estate investment trust (REIT). Theoretically investors would 
buy shares in the REIT thereby "monetizing" McDonald's unrecognized McDonald's real estate values.

During the November 2015 meeting with analysts McDonald's management told investors
they had wisely decided there would be no REIT and as it just wasn't a good fit for the 
system. However, management did disclose that by the end of 2015 the company will have 
sold four McDonald's locations for about $130 million. This may be the first time in history
that McDonald's has publicly discussed such transactions. I assume past transactions were
detailed in financial disclosures but the specifics were not broadcast. 

When Ray Kroc and Harry Sonneborn developed their approach to McDonald's real estate 
it was with the intention that there would be a McDonald's store at any specific location in perpetuity. They knew they couldn't build much of a chain if established stores were to come and go every 20 or 30 years. They either bought the property or secured leases with extensive options. 

This strategy had an added benefit - franchises could be bought and sold with the buyer confident they were acquiring a long term business - creating more equity for the seller. 

But a real estate formula that's worked well for 50 plus years is changing and Operators 
should be aware of this evolution. 

I won't try to predict what McDonald's management will do but I know how Wall Street analysts think and MCD shareholders are pretty predictable. Going forward analysts will 
be expecting a certain amount of activity in McDonald's real estate sales. The substantial 
sale prices of the four locations in 2015 will be the baseline. If management doesn't 
produce a comparable annual line item analysts will ask "why not?". 

Individual McDonald's shareholders will now drive-by their local McDonald's wondering if 
that location shouldn't become a mixed-use office tower.

And the REIT issue will not disappear. When McDonald's share price has a downturn or is merely flat or dividends don't grow investors will again want to revisit the REIT idea. A management team and board of directors who are not getting results for shareholders 
might be unable to resist.

This not meant to alarm all McDonald's Operators since it will not involve a lot of stores. 
At least in the saturated USA McDonald's can't build total sales and income by shutting 
down stores in large numbers. And, while many McDonald's properties have increased in value, there will only be a few where the resale value exceeds the future income stream 
as a McDonald's restaurant. But, things are gradually changing.

2016 should be the year that McDonald's Operators become more involved and more know-ledgeable about the properties they are renting. Nothing could be worse for an Operator's equity than questions about a store's long term existence. Nothing could be worse for a store's cash flow than having the owners of an independent REIT making decisions about store rent and other occupancy costs.


Bloomberg reports on the November meeting HERE

December 28, 2015

Subway's Franchisees - "Stop the Discounting"

As for those "Five Dollar Footlong" ads, Mr. Carroll said the marketing at one time
"made that offer so amazingly attractive: I'm getting an $8 sandwhich for $5." But, 
he added, "after a while you convince consumers that it's really only a $5 sandwich 
and so that's really what it's worth."

Behind Subway's New Post-Jared Strategy - AdAge

December 24, 2015

Delivery Still Hot Topic

Still wondering how it's going to work when there's a third
party in-between a franchisee and their customer.  

Sounds like lots of opportunities for finger pointing.

Delivery was the buzzword of the year for restaurants in 2015

December 8, 2015

December 7, 2015

Chipotle Mexican Grill to Tighten Food Safety Standards

I've always considered McDonald's to be the world's safest place to eat because of the 
relatively small number of closely controlled suppliers. The idea of a large restaurant 
chain "sourcing locally" sounded risky - and for Chipotle it has been.

In addition, Chipotle does not have an army of locally based franchisees helping to keep 
an eye on the suppliers, it all has to be done from the corporate office(s).

Chipotle Mexican Grill to tighten food safety standards for produce