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McDonald’s to reveal comeback recipe

May 04 2015 10:18
Craig Giammona

New York - Steve Easterbrook is preparing for his biggest moment as McDonald’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. US same-store sales dropped 2.1% last year, the biggest decline since at least 2000.

READ: McDonald's picks Briton as global chief

The company also faces pressure from labour 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% on the day it first announced plans for the presentation, the biggest jump in almost two months.

Monday’s proceedings get under way at 14:00, when the company plans to release a video message. A statement will follow at 14:30, with a conference call at 17:00.

READ: McDonald's faces 'show me' with new CEO

Here are five topics that investors and customers may be looking for Easterbrook to address.

Real estate

McDonald’s shares rose in March when hedge-fund manager Larry Robbins said the company could unlock at least $20bn in value by converting to a real estate investment trust. McDonald’s owns 45% of the land and 70% 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 US during a time when land was cheaper and more abundant, and it may not be eager to split off this valuable asset.

Refranchising

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 US and Canada, less than 1% are owned by the company. Compare that with McDonald’s, which still owns about 10% of its 14 300 US locations.

Mark Kalinowski, an analyst at Janney Capital Markets, suggested in a recent note that McDonald’s could pursue “meaningfully more refranchising in the US and abroad” as part of its turnaround.

Relationship building

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 customisable burger platform, Create Your Taste, to as many as 2 000 US locations this year.

Downsizing ambitions

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 programme.

McDonald’s is testing a platform called Taste Crafted, which lets diners customise burgers and chicken sandwiches with fewer options than Create Your Taste. It also works at the drive-thru, which accounts for 60% 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.

READ: McDonald's revamps grilled chicken, rethinks menu

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.

mcdonald's  |  fast foods  |  retail
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