McDonald’s (MCD) new CEO Steve Easterbrook told Wall Street and the media Monday that he understands “the urgent need” to fix his struggling hamburger chain. But his plan to revive the company left many unconvinced those steps would do much to stop the company’s bleeding.
Easterbrook, who took the helm in March after one of the worst years in McDonald’s history, when revenue, profit and customer traffic all fell, had promised last month he would unveil a detailed turnaround plan. Many investors had expected a presentation full of specifics on how the world’s largest restauranteur would improve the quality and reputation of its food and customer service.
Instead, analysts heard about prosaic plans like McDonald’s new organizational structure (it will lump international markets together by specific characteristics rather than by geographic proximity), its intention to sell many more restaurants to franchisees than originally planned, and to cut costs to the tune of $300 million a year. For its efforts, McDonald’s saw its shares slip while S&P downgraded its credit rating.
Here is a quick look at why McDonald’s big close-up failed to impress:
1) The devil is in the details. So where are the details?
McDonald’s has fallen behind rivals like Wendy’s and Chipotle Mexican Grill (CMG) because it has been bogged down by a big bureaucracy and unable to adapt to changing customer preferences. That is particularly true in the U.S., where customers are increasingly preoccupied with healthy food and how animals are raised.
In recent months, McDonald’s has announced tests like the ability for customers to personalize their burgers, all-day breakfast, and a new larger (one-third of a pound) burger. But the company gave few details on how those efforts or going or whether they’ll be rolled out across all restaurants. “There is no more clarity on new products or changes in operations,” Richard Adams, owner of Franchise Equity Group, a consulting firm focused on McDonald’s franchisees, told Buzzfeed News.
2) Little specific mention of food
Monday’s presentation, made via webcast, was a let down for many because McDonald’s said its three areas of focus were driving operational growth, revitalizing the brand and “unlocking” financial value. The company did not focus on food, or any menu changes, even as its reputation on that front continues to suffer. Last year, it ranked last in an annual ranking of fast food restaurants by the American Customer Satisfaction Index, only one of many surveys to find McDonald’s severely lagging up-and-coming rivals like In-and-Out Burger in the western U.S. Among many others.
(Earlier this year, McDonald’s did eliminate some items from its menu, like Wraps, to simplify an offering that had proved too unwieldy for its kitchens to handle efficiently. But other big changes to the menu are expected.)
3) Selling more stores to franchisees- but relations are fraught
McDonald’s wants 90% of its restaurants to be franchise-owned by 2018, up from 81% of 36,000 or so locations now. So it is accelerating its plan to sell more restaurants (3,500 by 2018) to franchisees. The upside is a more predictable cash flow and revenue and more accountability on the franchisees.
The problem is that McDonald’s relations with franchisees have never been lower, according to a survey two weeks ago by Janney Capital Markets. (The company told Reuters it had “solid working relationship with them.”)
McDonald’s didn’t help matters when it announced a raise for workers at company-owned restaurants, putting franchisees on the spot. What’s more, franchisees see more disconnect with headquarters in the custom-burger experiment, which was launched at a time service is still bogged down by an overly expansive menu. Franchisees typically operate multiple restaurants, so it’s fair to wonder whether these company-owned restaurants would easily find buyers in this environment.
4) What about real estate?
McDonald’s shares jumped in March after hedge-fund manager Larry Robbins of Glenview Capital Management said in a Bloomberg article the fast-food chain’s market value could rise at least $20 billion by converting into a real estate investment trust. REIT, as they are known, would let the company distribute its profits largely free of tax. On Monday, Easterbrook skirted the issue, saying only he would tell investors if he had anything to share on real estate, or a potential REIT.
Easterbrook, widely respected for how he turned around McDonald’s in his home country of Britain, is not to be underestimated. And his deliberate, thoughtful approach may yet pay off. The custom burger program, Create Your Taste, is only at 30 U.S. Restaurants right now, for example. He prefers to ‘get it right, rather than do it fast.’ His predecessor, in contrast, had wanted the program at 2,000 U.S. McDonald’s by the end of the year.
But after all the fanfare leading up to Monday’s announcement, which included a 23-minute video, there was a feeling of too much ‘wait-and-see’ in this plan and not enough urgency. To be fair, Easterbrook did say that ‘there’s more to do and more to come.’ Still, given how much McDonald’s business has been deteriorating, many wanted to see more beef in McDonald’s plans.
“Why does it seem difficult for $MCD (to) express a sense of urgency in fixing the business model? The 2017 goals are a lifetime away!” Tweeted Howard Penney, managing director at Hedgeye Risk Management, a Connecticut-based research investment firm who recently shared his advice for McDonald’s with Coins2Day.
For more about McDonald’s, watch this Coins2Day video: