McPick cannot survive increases in the min. wage. The value menu days are almost over.
McDonald's needs to get their cost down to where they can prosper on lower top line sales. Deep discounting to drive dollars into Oak Brook must become a thing of the past. Labor costs will clearly continue to go up along with most other cost like utilities and interest rates to name but a few. Discounting will only compound financial problems for the operators and result in lower reinvestments and cash flow. I believe that many store rents cannot be justified under the formula the company say they use. My opinion is that MCD has gotten their base cost so high that revenue coming in from rents, service fee's and other sources will not support their high life style. Easterbrook seems to understand this and is taking steps to correct it. However, I believe that more has to be done to reduce their unproductive staff in the regions. They are eating corporate profit and cash flow and should be gone. Too many are more concerned about political correctness than profit and the cost of this is high. They are leaving a lot of cash on the table. Discounting is not near enough to be effective.
I'm sure there is still a lot of fat in the McDonald's bureaucracy but it's doubtful that trimming that fat can, over the long term, satisfy the shareholder's appetite for earnings growth.McDonald's shareholders expect year over year growth in dividend pay outs. Since McDonald's is building few additional locations in the USA that growth can only come from increasing same store sales.Don't look for adjustments in the rent and service fee business model (that reduces shareholder income) but only for more pressure on same-store sales.
I agree and I think Management does, as well that is why they are putting so much attention on increasing "guest counts". Increasing "Guest Counts" has always been reconized as real growth. However, paying customers to come into the stores by deep discounting is counterproductive and is not real growth. Growing customer counts requires listening and talking to our customers to determine what they want. This is an about face for MCD. MCD has generally taken the democrates approach to our customers by saying we know whats best for you better than you know whats best for you. Since the 80's customers have been asking for egg McMuffins and other breakfast products all day. Our response was you can't have them after 10:30AM. Breakfast all day generated real growth simply because it is what customers wanted. When we hit the 13th month on that program real growth will need to come from other innovation. Customers are saying they want fresh and healthy. We need to give it to them. Our marketing needs to tell them we have it or will soon have it. You are correct in that shareholders want growth in dividend payouts. Giving customers what they want but discounting those products to simply cover costs will get new customers in the door but won't do much for increasing dividends to shareholders or cash flow for the stores. Again, I agree that it would be foolish to expect any discounting of the rent and service fee's.
It wasn't that long ago that the common rent on a franchisee store was 8.5%. It is not unusual today to have rents as high as 15%. It is unlikely that any stores recently opened will have rents under eleven per cent (11%). In addition to the traditional cost of opening a new store operators are spending extra money to buy down rent to 12%. Unreasonably high rents, deep discounting, rising interest rates, rising labor cost, increasing bank fee's, insurance to name but a few are all part of the pricing structure. Only someone uninformed about the restaurant business would ask why are restaurant prices not coming down? Falling food cost at the back door certainly helps but it does not come close to allowing prices to be reduced.
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