McDonald’s Shows No Signs of Shaping Up (MCD)

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McDonald’s (MCD) Chief Executive Steve Easterbrook is in a pickle and not the good kind found on the chain’s Big Mac.

mcdonald's-mcd-stock ko stock yum stockNo, the 47–year-old Brit is in the bad type of pickle, an intractable situation with no easy answers, which is why investors should think of MCD stock as if it were plutonium and stay as far away from it as possible.

The first strike against McDonald’s is its dismal relationship with its franchisees, who own the vast majority of the 14,000 or so McDonald’s restaurants around the world. In the not-too-distant past, owning a McDonald’s franchise was a license to print money.

That isn’t the case any longer as MCD has fallen out of favor with just about every customer demographic under the sun over the past few years. Data from Technomic shows that average MCD franchisee revenue has plunged to $2.4 million from $2.5 million in 2013.

MCD’s problems have many causes. First, McDonald’s hasn’t had a “hit” since 1993, when it first introduced the McCafe. Everything else MCD has done since then — from Angus Third Pounders to Snack Wraps — have fallen short of the mark. McDonald’s tries to be all things to all people and is failing.

Emphasizing the Dollar Menu has cheapened the MCD brand. McDonald’s burgers constantly have fared poorly in consumer taste tests for years, and though Easterbrook has vowed change is coming, his plans has gotten tepid enthusiasm from Wall Street.

Franchisees, unfortunately, are baring the brunt of these poor decisions. Though franchisees aren’t technically McDonald’s employees, MCD dictates how the franchisees’ businesses are run even to the most minute of details.

However, if a franchisee is angry at how they are being treated, their options are few because of the ironclad contracts they sign. Practically speaking, they can’t change a McDonald’s to Burger King, which is owned by Restaurant Brands International (QSR), or Wendys (WEN), which don’t gouge their franchisees to the extent of McDonald’s.

Over the past year or so, there have been media reports that these independent business owners were increasingly upset that their fees to MCD were rising while their profits plunged. To make matters worse, many franchisees have shelled out big bucks in recent years to pay for renovations McDonald’s demanded.

A recent Wall Street Journal report underscores the misery of many McDonald’s owners. Get a load of what one franchisee said:

“I have never seen the operator community so demoralized, frustrated and distrusting … there are operators who are looking at the calendar and saying, ‘If business doesn’t get better in six months, I have a problem.’”

What’s even more sad is that Janney Capital Markets painted a far grimmer picture in its recently released MCD franchisee survey, which showed that their six-month outlook was the worst it’s been in the 11 years that the firm has conducted the survey. Multiple operators told Janney that relations with McDonald’s were the worst they had ever seen, and as the Journal noted, relations won’t be improving anytime soon.

Easterbrook’s plan to jumpstart the chain’s moribund U.S. sales relies heavily on the bank accounts of McDonald’s operators. MCD’s plan to offer customizable burgers will cost $125,000. Keep in mind that Burger King has done customizable burgers forever. Why this seemingly simple task has flummoxed McDonald’s for so long is one of the great mysteries of the restaurant world.

All-day breakfast? That’s about $700,000 when remodeling is included. Rent is surging, and McDonald’s hyped decision to raise wages at company-owned restaurants will pressure franchisees to do the same.

Shares of MCD have barely budged this year, gaining less than 3%. Some commentators have said that the time may be right to buy MCD stock because an activist was bound to try to shake things up.

Deutsche Bank even recently declared MCD stock as a “top pick,” arguing that it has great potential to turn around and gave the stock a $120 price target — a 24% upside. I think that’s crazy.

Indeed, MCD seems stuck in a rut with no easy escapes. The fact that MCD recently stopped reporting same-store sales isn’t a good sign either, and unless Easterbrook can win over franchisees, his turnaround plan for McDonald’s will never fully cook.

As of this writing, Jonathan Berr did not hold any of the aforementioned stocks.

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Jonathan Berr is an award-winning freelance journalist who has focused on business news since 1997. He’s luckier with his investments than his beloved yet underachieving Philadelphia sports teams.


Article printed from InvestorPlace Media, https://investorplace.com/2015/06/mcd-stock-mcdonalds-franchisee/.

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