July 28, 2018

McDonald's Q2-2018 Earnings Call

Best analyst question:
Jeffrey Bernstein - Barclays Capital, Inc.
Great, thank you very much. Just touching on the company-operated and, I guess, maybe more importantly, the franchise profitability, I think you said all constituents are behind you in terms of being more nimble. But with the continued pressure on labor and, I guess, to a lesser degree, food costs, it seems like you want to keep pricing below food away from home. But do you think the franchisees are okay with the near-term margin pressure or do you think maybe that this inflationary environment is unusual and, therefore, justifying a further bump in the pricing, whether or not that's on premium or still keeping the value? I'm just trying to gauge the franchisee sensitivity to this aggressive value push and their profitability.
Stephen J. Easterbrook - McDonald's Corp.
(This is part of his answer)
Are they still entirely unified behind the plan we have and believe in its long-term strength? Absolutely, right. And there's nothing we want to do more than grow operator cash flow, because that's such a great motivator for future investment and future confidence. So in the immediate term, they are pragmatic, but we certainly have a desire to be growing, not just our own income and margins, but also their cash flows as well.
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12 comments:

Richard Adams said...

There were more than the usual number of questions about the welfare of McDonald's franchisees on this call. Probably due to Operator comments on the latest Kalinowski Operator survey.
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Anonymous said...

It's a stupid question. Do they think he would say, no, the operators are not supportive of our plans because it is obvious to everyone that operator cash flow is meaningless to us. Building top line sales that increase rent and service fee's to MCD does not simply increase operator cash flow. They know it and we know they know it but they offer no other alternatives.

Richard Adams said...

Not a stupid question but management would have been eager to address this issue. A few days before this call Mark Kalinowski at Kalinowski Equity Research published a McDonald's Operator survey that showed relations between McDonald's franchisees and McDonald's Corp. are at the lowest point in the fifteen years he's been publishing his surveys.
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Anonymous said...

"And there's nothing we want to do more than grow operator cash flow, because that's such a great motivator for future investment...." LOL!!

Anonymous said...

Mcd is no longer our partner They are our Enemy

Anonymous said...

Management has virtually gutted the field service department(s), now eliminating
regions and calling them field offices,preparing to shift more costs to the operators
for training, which will be a huge cost shift. Send someone to Hamburger
University and compete for hotel rooms with travelers, and businesses in Downtown
Chicago. Good news, the jig is up on management, their plans for sales increases
have generally failed, the consolidation of co-ops has been a disaster,
and all the seasoned talent is now being picked up by our competitors. Some of
management is so prejudiced against chicken that they actually believe that chicken
has no place on the McDonald’s menu. To that end, the chicken suppliers are actively seeking buyers. The distribution companies have had to divide up their companies,
now supplying Chick-fil-A with the experience and equity that we have built up over
the last 45 years. Our sole-source suppliers are now producing product for our
competitors. Average pricing is subsidizing the large markets so that they can compete
on the menu price. The smaller markets with the lower disposable income are suffering in paying higher prices for products produced in large labor-intensive markets. For instance, the sauce plant in Conyers, Georgia operated by Golden State Foods for 40 years now produces sauces for Chick-fil-A and Zaxby’s. The McDonald's sauces that are produced in Conyers are dedicated to Central and South America, while the sauces that are used in the Atlanta area come from Southern California. I can’t make this stuff up. When McDonald’s interrupted the sale of chicken tenders under the guise of running out of product they
pulled the coup of the century, or so they believed. The chicken suppliers are cutting
up the breast on these 9 lb. birds and calling them tenders when in fact they are of
poorer quality than the actual tenderloin. It is gutsy...”

Anonymous said...

The 2020 plan is simply not working. There is a major disconnect between management
and the franchisees. We don’t respect the methods employed by the regional
offices. Without that respect, management’s efforts will be weakened and ineffectual.”

Anonymous said...

Cash flow is suffering, their funny math does not add, up cannot keep borrowing for 2020 there will be so much debt owed in the next few years in 7 years we will be one of the oldest and tired brands out there as there will be no borrowing power or money left to reinvest further. You will not even have the money to remove your huge dated kiosks, you will just have tile patches that your new franchise partner will ask what are those patches on the floor.

Anonymous said...

How can I read the latest Mark Kalinowski operator survey?

Richard Adams said...

Mark operates Kalinowski Equity Research and his reports are for the benefit of his paying clients. The reports are not public documents. Apparently, he sends copies to a few media outlets since Operator comments end up being quoted often.

But I can't post the reports here, they're not mine. Every investment firm and analyst does this differently. In the past, I was able to post links to David Palmer at RBC Capital but
now his reports are behind a wall accessible only to their clients.
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Anonymous said...

We were never behind the plan. We were held hostage until we signed on.

Anonymous said...

Correct, we were and still are not behind the plan. Those who ask the wrong questions are silenced and receive unbelievable scrutiny in their restaurants. If they are weak, they are taken out. If they are strong, they are bought out.

Someone above said it best. They are the enemy, treat them as such.

Leadership is hearing but not listening, they don’t care. They have done what I’ve seen so many stupid organizations do, forgot or don’t care what got this brand to greatness. Hint: it wasn’t over the dead bodies of others, it was with the right people doing the right things.

Field service used to (30yrs ago) be around to help O/O’s grow business. This changed and is clearly the opposite, it is all the way up.

On this trajectory all that may be left is crappy operators running crappy stores with crappy service and crappy support led by dumbbells who are pretty talented spin doctors. Even good operators when faced with fighting for their economic lives will have to succumb to understaffing leading to what most McOpCo’s are, profit centers with no soul, scraping every last hour and penny. We cannot run this business properly under this model, staff well and achieve great results. The formula for success 25 yrs ago was simply run it well and staff well. It’s impossible to do today.

This is all very similar to politics, Corporate execs are in this just like elected officials, decisions made to get re-elected and to get rich themselves. A healthy environment works for all- everyone helps. This top down BS model is clearly flawed, I’d like one example where centralized command and control worked well over an extended period of time with sustained growth. I know of none.

In my opinion this will fail and a new crop will file in, hopefully with an understanding of what really does work. It’s definitely not this.

I’ve talked to 40yr veterans who CRIED when they talked about their love for the brand. MANY will move heaven and earth to make this brand work but they keep firing them or they jump ship first.

It’s also like about anything in life. Some have to hit bottom to get honest. Right now I see honest words but no real action. Just more costs, maybe mass failing O/O’s will turn the tide, I hope it doesn’t go that far.

Since I’m on a roll, let’s talk about being customer obsessed. How in the hell is asking customers and bullying O/O’s into forcing a 20 question survey that is used for internal purposes “customer obsessed”? They already voted with their wallet, ask them 3 questions if you want and thank them for their business. How in the hell is making massive business decisions based on pressure from NGO’s who don’t even like us and that slows service, screws up the flavor of our food and produces sweaty crappy drinks “customer obsessed”?

...but the “foam cup realignment” or whatever the hell they called it “only resulted in a .5% sales impact across the business. BS. Horse...you-know-what. I do not believe this. Even if it is right, how in the hell does one reconcile “customer obsessed” with doing crap that they don’t want? Guys...you’re talking to the wrong people. The ones you want to talk to don’t want to fill out that stupid “Voice” thing you’re so obsessed with. They want to get in and out fast and they actually buy our products, they don’t march on DC with vaginas on their heads and they don’t scream about the styrofoam impact to the environment. And they are in my DT right now, running late for work because I’m fooling with this broken model. The end.

Rant over. Thank you, Richard.