Jonathan Maze does his usual fine job of recapping yesterday's MCD conference call.
Chris K. says: “We don’t have a strategy problem,” he added. “We simply didn’t execute at the level we needed to in the second quarter.”
In other words: There's nothing wrong with what we're doing - we're just doing it wrong.
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What stood out to me on the earnings call was Chris saying, “We don’t have a strategy problem. We simply didn’t execute at the level we needed to.” That’s a tough statement for operators to hear when he also admits the restaurants were overwhelmed with too many deployments, value changes, digital changes, beverages, promotions, etc. If the restaurants were overwhelmed by what the system pushed into them, I’m not sure you can turn around and call it an execution problem. He also keeps talking about strong operator “alignment” around value, yet only 60–65% of the system followed the recommended EDAP pricing. Maybe that isn’t an alignment problem. Maybe operators are looking at their P&Ls and questioning whether the economics work.
The comments that bothered me most were around pricing and investment. Chris said pricing compliance is now part of business reviews and can affect things like “growth and eligibility.” At that point, how “recommended” is recommended pricing? Then, when asked about declining franchisee cash flows and the investment coming with NEXT and another remodel cycle, the response was basically that franchisees are financially healthy and have “a lot of borrowing capacity.” Borrowing capacity is not cash flow. Operators have been absorbing higher labor, food, insurance and operating costs while continuing to reinvest in the restaurants. We all understand that McDonald’s has to win on value, but value has to drive profitable incremental traffic, not just sales and transactions that improve corporate royalty income while operator cash flow continues to decline.
I’m all for NEXT, better food, better hospitality and getting our swagger back. But there have to be three winners: the customer, McDonald’s and the operator. If the customer gets lower prices, corporate gets higher system sales and royalties, and the operator gets lower margins and more debt to fund the next investment, that’s not a sustainable definition of alignment.
"Borrowing capacity is not cash flow" - What a profound statement.
In other words, managment is perfectly comfortable with loading the Operators with more and more debt in order to upgrade the MCD real estate portfolio. And they know that's exactly what shareholders want to hear.
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100% Accurate
McD continues to shift excessive costs to the operators, damaging our equity. Nice "partner" Huh??
Meanwhile the NFLA sits by and accepts every corporate word as gospel. Good grief, owners have no voice !
Lets see if the new OPNAD chair (Scott) has the wherewithal to resist this disastrous marketing.
Im betting more of the same.
What's this "partner" stuff? The partnership is between management, the board of directors, and shareholders. Franchisees are never really "partners" in that they always come last in any consideration. No one treats a "partner" like that. Two things make my skin crawl: 1) when McDonald's franchisees are called "partners," and 2) when McDonald's Corp. hires an executive off the street and immediately calls them "a member of the McFamily".
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In other words PJB is saying that all the corporate suits are hatching brilliant schemes and the operators forget how to flip burgers and messed it all up, so they need to borrow more money? Got it. That mindset destroys franchises.
I agree that the NFLA is useless. So whats the alternative?
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