The Problem with the McDonald’s Turnaround

On May 4th2015, McDonald’s Corporation  announced initial steps in a turnaround plan which included the following activities – restructure the business into four segments, beginning July 1, 2015 – U.S., International Lead Markets, High Growth Markets, and Foundational Markets; refranchise 3,500 restaurants by the end of 2018; capture approximately $300 million in annual general & administrative expense savings; and, embark on a three-year return of cash program to shareholders totaling $18 to $20 billion.

Other than the announcement of a turnaround, there was no complete turnaround plan communicated, i.e. what happened to place you in this situation and what is your plan to get out of it.  At this point, all we have to go on is a collection of press articles and press releases.

The clearest sign that turnaround assistance is required is after a steady erosion of your business economics.  The turnaround at McDonald’s Corporation is required based on the substantial economic drop in its business model, since 2013 –

As of Revenues ($000) Gross Profits ($000) Profit Margin
12/31/2014 $27,441,300 $10,455,700 17.00%
12/31/2013 $28,105,700 $10,902,700 20.00%
12/31/2012 $27,567,000 $10,816,300 20.00%
12/31/2011 $27,006,000 $10,686,600 20.00%

http://www.nasdaq.com/symbol/mcd/financials?query=income-statement

A business may find itself in need of turnaround assistance based on unforeseen external factors.  There are many reasons why an organization may require turnaround assistance.  Rarely is it due to a single factor.  The primary impetus for the McDonald’s Corporation turnaround requirement seems to be associated with competition from new entrants to the market and shifting consumer preferences.

In any turnaround, transparency and communications are integral for investors, analysts, potential franchise owners, rating agencies and employees.  When the turnaround is transparent, interested parties understand your direction and the value of the changes being implemented.  But absent this information, confusion is a high probability.  Based on a review of openly available information – some of the action items slated for implementation seem to be contradictions.

Steam-line menu

Variations and food options impact the speed and efficiency of the restaurant kitchens.  Testing is underway in Delaware, Little Rock, Waco, Bakersfield, Macon and Knoxville to simplify the menu and reduce options.  However, in another article you may read about menu additions planned or being tested, including all day breakfast, burger customization, a premium sirloin burger, and a premium chicken sandwich.  As of 2014, McDonald’s Corporation maintained 121 menu items.  Will the additions come before the reductions, further slowing down the restaurant kitchens?  What has the research shown with respect to the expected impact on customer satisfaction, from the menu reductions?

I believe that McDonald’s is a victim of it branding. The company is positioned as great tasting and inexpensive food. Where ever I go in the United States, I can purchase the same meal, with the safe quality. Most of us can repeat the ingredients in a Big Mac, i.e. two all-beef patties, special sauce… That is part of its branding. The slogan did not end with “or feel free to change it up.” The positioning – consistent quality, fast and at a low cost.

I do not think of McDonald’s when I want healthy or organic or custom fare. Very few brands have ever had success at a quality transformation. The only transformation that comes to mind is “Made in Japan.” That was not a positive in the 70’s. But in the 80’s, that all changed with the explosion of Japanese vehicles, i.e. Honda and Toyota. While it is not impossible, it is very expensive to re-brand.

Return cash to shareholders

On the heels of the recent year-to-year decline in profits from 2013 to 2014, McDonald’s Corporation intends to return $8 to $9 billion to shareholders in 2015.  At the same time, McDonald’s will be embarking on a turnaround which requires the use of surplus cash up front, to design new processes and launch new products.  For example, a new 31 page procedure to improve order taking and fulfillment accuracy was implemented in a Wyoming franchise, beginning December 2013.  The change was implemented to reduce the time to service customers, and increase customer satisfaction.  Based on its success, training and roll-out is slated for the summer 2015.  The role out of this new process to all 36,000 locations will require an investment by the organization.

Recently, the rating on McDonald’s Corporation debt was lowered by the three big rating agencies – Fitch lowered its issuer default and senior unsecured rating to triple-B-plus from A; S&P lowered its corporate credit rating to A- from A; and Moody’s lowered its senior unsecured rating to A3 from A2.  As McDonald’s debt ratings decline, the cost of borrowing will increase for the corporation.

Data Distribution

A redesign to turnaround a business cannot be completed behind the scenes.  Progress sharing with your investors, analysts and employees is very important.  But beginning July 1, McDonald’s Corporation will discontinue reporting sales figures monthly, and will begin to only report quarterly.  A turnaround usually results in a period of high analysis and the development of metrics to measure and manage the business.  Success at achieving your strategic goals, based on the metrics, is important to stakeholders.  Reducing the flow of information during a turnaround, may be counter productive to your efforts.

Once a Turnaround is announced, the focus should be on strategy, planning, cash flow, reporting, optimizing policies and procedures, marketing and business development.  However, currently McDonald’s Corporation is experiencing an attack on its brand from several fronts.  These attacks can be distracting and damaging in the press, when interested parties do not have a full understanding of your intended direction.  Examples of two such issues include – a Legal proceeding to determine if McDonald’s Corporation shares some responsibility for the actions of franchise employees, with respect to low wages; and The Children’s Advertising Review Unit claimed that McDonald’s Corporation advertising placed an emphasis on the toy that was part of the Happy Meal vs. the food in the Happy Meal.

I believe that McDonald’s Corporation would benefit if the turnaround plans were more fully communicated to investors, analysts, potential franchise owners, rating agencies and employees.

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.
© Copyright 2015 Regis Quirin, All rights Reserved. Written For: CFO Tips - What you need to know, to be a CFO TODAY!

Regis Quirin

Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

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