RBC: An 'unusual franchise-only meeting' at McDonald's set the stage for 2018 and beyond
- While McDonald's has been aggressively upgrading its US stores, its franchisees are feeling the pain.
- McDonald's franchisees gathered at an unusual meeting last week discussing their concerns of the burger giant's disappointing sales and what has caused its current dilemma.
- RBC summarized five major changes that have set the course for McDonald's 2018 performance and beyond, and added that the burger chain will take actions to send the company back on track.
- Watch McDonald's trade in real time here.
McDonald's has been aggressively upgrading its US stores under its "Experience of the Future" initiative, which focuses on restaurant modernization and digital engagement. But its franchisees have been complaining that the cost of the remodeling is becoming a burden as sales aren't growing fast enough to support a sufficient return.
As a result, McDonald's franchisees hosted an unusual meeting last week at the office of a large franchisee in Tampa Bay, Florida, to discuss their concerns over the burger giant's disappointing sales and what has caused its current dilemma.
The operators concluded that at least five major changes have set the course for McDonald's 2018 performance and beyond, according to RBC analyst David Palmer. He believes the burger chain will respond by adjusting improper parts of the major changes and send the company back on track to deliver improving sales growth next year.
"We believe this unusual franchisee-only meeting will prove to be a healthy event in the evolution of a built-to-last brand and franchised organization," Palmer said in a note sent out to clients on Monday.
Here are the five major changes summarized by RBC:
- Rapid pace of reimaging and Experience of the Future upgrades
The company said during its quarterly earnings on July 26 that it forcasts a total of $1.5 billion of capital expenditures for US business in 2018, primarily focused on accelerating the pace of EOTF. McDonald's expects to complete EOTF at nearly 4,000 additional US restaurants in 2018, making half of the total US stores EOTF by the end of 2018.
"McDonald's reimaging and Experience of the Future renovations have been highly disruptive to sales, although that drag has begun to diminish," Palmer said.
By his calculation, the EOTF upgrades has dragged down McDonald's sales by more than 100 basis points in the first three quarters of 2018 and will continue to add pressure on its top line until 2020.
- A launch of the national $1, $2, $3 Menu
The burger chain rolled out its nationwide lineup of low-cost foods, called the $1-$2-$3 Dollar Menu, at the start of this year, hoping to gain traffic in a competitive fast-food environment.
But the dollar meals have "failed to provide the sufficient traffic and sales lift to offset the other changes partially because it lacks compelling marketing or a hero item on the menu," Palmer said, adding that consumers still struggle to describe what is on that menu.
- Core menu ingredient and preparation upgrades (e.g. fresh beef)
The company also launched in March its fresh beef quarter-pound burgers in US restaurants, cooking signature crafted recipe burgers right when ordered.
"The fresh beef quarter pounders were less incremental to sales than hoped, partly due to throughput issues that arose," said Palmer.
- A sharp reduction of regional marketing spending to subsidize national advertising and other initiatives
McDonald's investments the $1-$2-$3 Dollar Menu, fresh beef burgers, and EOTF are at some expense of its regional marketing support, which removed some level of local "control," RBC says.
"The reduction in regional marketing support-which often centered on value and breakfast-has become a greater-than-expected drag in markets that needed greater-than-average support for these two areas," Palmer said.
- A dramatic reduction in corporate staff with lowered number of meetings and communication with franchisees.
The company reduced the number of regional offices from 22 to 10 in July while also reducing the number of franchisee committees and franchisee participants in committees, according to RBC.
"These changes have removed some established and trusted corporate-franchisee relationships and left many experienced franchisees with less of a voice," said Palmer.
To be brief, McDonald's franchisees, who have been asked to buy touch-screen machines to upgrade store front and equip with refrigerators to store fresh beef, are also seeing the company grabbing more control through centralization of marketing decisions and reducing the number of franchisee committee meetings.
With McDonald's franchisees speaking out, the fast-food giant will take relative actions, such as shifting some marketing spending back to the regions, becoming more collaborative with its franchisees in the future, and making some modest adjustments to the required pace of reimaging and EOTF spending, according to Palmer.
"We believe McDonald's will likely adjust value messages on a regional basis in early 2019," he said. "We still have a bullish view toward 2020."
Palmer has a "buy" rating and $175 price target for McDonald's.
Shares were down 5% this year.
- Here's why the recent chaos in markets is the new normal
- The CEO of the biggest cannabis company in the US reveals what's next following a $682 million acquisition
- Howard Marks made billions piling into the market at the depths of the financial crisis - here's why he's continuing to buy now, and what it would take for him to stop
- Pathan, Liger, Godfather: Here’s a list of forthcoming movie releases that will decide the fate of the multiplexes
- Taj Mahal continues to lose its sheen due to pollution in the Yamuna and industrial emissions
- ICICI Bank market-cap hits ₹6 lakh crore as its stock rises to a record high
- Jio, Airtel could emerge stronger weakening Vodafone Idea further, say analysts
- Foreign investors pour over Rs 12,000 cr in Indian equity in last 10 days