McDonald’s to Reveal Comeback Recipe: What Options Are on Table?Craig Giammona
Steve Easterbrook is preparing for his biggest moment as McDonald’s Corp.’s new leader on Monday, when he unveils a much-anticipated plan to put the shine back on the Golden Arches.
The company veteran, who was elevated to chief executive officer in March, is confronting the chain’s worst sales slump in more than a decade. And the challenges have been particularly pronounced in McDonald’s home market. U.S. same-store sales dropped 2.1 percent last year, the biggest decline since at least 2000.
The company also faces pressure from labor groups, which weren’t mollified by a plan to boost pay at company-owned stores this year. The Fight for $15 campaign, which is pushing for wages of at least $15 an hour, plans to protest at McDonald’s shareholder meeting on May 21.
Investors, meanwhile, seem optimistic about what Easterbrook has to say. McDonald’s stock climbed 3.1 percent on the day it first announced plans for the presentation, the biggest jump in almost two months.
Monday’s proceedings get under way at 7 a.m. Chicago time, when the company plans to release a video message. A statement will follow at 7:30 a.m., with a conference call at 10 a.m.
Here are five topics that investors and customers may be looking for Easterbrook to address.
McDonald’s shares rose in March when hedge-fund manager Larry Robbins said the company could unlock at least $20 billion in value by converting to a real estate investment trust. McDonald’s owns 45 percent of the land and 70 percent of the buildings for its restaurants and could add $25 to its share price by putting those holdings in a REIT, Robbins said.
That wasn’t the first time the idea has been floated, but McDonald’s has given no indication it wants to go that direction. For one thing, the company generates billions in profit from the rent it charges franchisees. The fast-food chain spread across the U.S. during a time when land was cheaper and more abundant, and it may not be eager to split off this valuable asset.
Is it time to follow Burger King’s lead?
McDonald’s biggest burger competitor has increasingly sold its company-owned restaurants to franchisees -- a process known as refranchising. Of Burger King’s approximately 7,300 locations in the U.S. and Canada, less than 1 percent are owned by the company. Compare that with McDonald’s, which still owns about 10 percent of its 14,300 U.S. locations.
Mark Kalinowski, an analyst at Janney Capital Markets, suggested in a recent note that McDonald’s could pursue “meaningfully more refranchising in the U.S. and abroad” as part of its turnaround.
One immediate challenge for Easterbrook: repairing the ties with the company’s franchisees. A recent Janney survey found that the relations between McDonald’s and its independent operators has hit a nadir. Without franchisee cooperation, it will be tough for Easterbrook to get traction for his initiatives, including plans to bring McDonald’s customizable burger platform, Create Your Taste, to as many as 2,000 U.S. locations this year.
Create Your Taste is expected to cost more than $100,000 per restaurant, and some franchisees are concerned about the price tag. But there are signs that Easterbrook may be downsizing the program. McDonald’s is testing a platform called Taste Crafted, which lets diners customize burgers and chicken sandwiches with fewer options than Create Your Taste. It also works at the drive-thru, which accounts for 60 percent of McDonald’s sales, according to Kalinowski. The simpler approach will be cheaper for franchisees to implement, he said.
FIX THE FOOD
Since taking over, Easterbrook has announced that McDonald’s will stop serving chicken raised with some antibiotics. The company also recently started offering “artisan” grilled chicken and premium sirloin burgers -- attempts to stem the exodus of younger consumer to higher-end chains like Chipotle. But these additions come with a price. Franchisees and analysts have said the McDonald’s menu is bloated, and that the glut has slowed down service.
McDonald’s eliminated seven sandwiches in the first quarter, but it still has about 40 more items than it did in 2007. Having fewer, better-selling items is key. Reigniting sales growth ultimately comes down to getting more customers into restaurants, and that starts with fixing the food.
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