Most analysts writing about McDonald’s Corporation (NYSE:MCD) are talking about the wrong thing. They talk about banning plastic straws or flipping the arches into a giant W for International Woman’s Day. They talk about tuition help for the high school kids in its crews. They may talk about the McDonald’s stock momentum, or recent lack of it.
What they don’t talk about and should, are the strategic changes CEO Steve Easterbrook initiated after becoming CEO in March 2015. Specifically, his decision to move away from company-owned stores, back to a franchise model, but with a twist.
Instead of seeking mom-and-pop operators, as founder Ray Kroc did, Easterbrook has sought out corporate owners who would take over whole territories, like Taiwan.
Corporate Overlords
The result is that McDonald’s gets the benefits of corporate ownership without the hassles of dealing with complaints from people owning one or two stores, complaints that also bedeviled his predecessors.
Small franchisees take corporate issues personally. They question corporate directives and often look only to their short-term bottom lines. Corporate franchisees will see the larger picture and, when they have problems, negotiate them with the main company in private. They won’t talk to reporters or fill out surveys.
The difference can be seen in McDonald’s results. Under Easterbrook, the top line has been steadily shrinking, from $25.4 billion in 2015 to $22.8 billion last year. But the net income line has been steadily growing, from $4.5 billion in 2015 to almost $5.2 billion last year.
This is the secret sauce for McDonald’s stock not the Thousand Island dressing on some of its sandwiches, or even its all-day breakfast, which Easterbrook initiated. Being a franchisor is more profitable than being a franchisee, even though more of the cash goes into final sales at the store.
Having corporate franchisees who understand that the key to their success is scale, rather than margin, and that a successful business has one head, at corporate, has allowed Easterbrook to do more strategic thinking and worry less about tactics.
It means issues that might have been big problems before, like whether “corporate” or the “franchisee” is responsible for labor law violations, become less important because however the government rules, it’s a publicity-shy corporation that will follow-up.
The Next Steps for McDonald’s Stock
It means McDonald’s can announce it will cut pollution and mean it, because the details will be negotiated in boardrooms and implemented.
It means McDonald’s can implement technologies like kiosk ordering, digital menus that change as the day’s tastes do, and data analytics knowing that franchisees will take their share of the investment, because they’re looking strategically just as Easterbrook is.
It means that when corporate decides to switch to fresh beef in the burgers the decision can be implemented quickly, as it doesn’t take many franchisees to represent as many as 3,500 restaurants. A faster response to corporate innovation improves every franchise’s reputation.
The Bottom Line for McDonald’s Stock
It can be confusing to analyze McDonald’s because so much of the news surrounding it is irrelevant to the investment case. Things happen in stores seen as the center of their communities, the go-to place for inexpensive meals.
Investors should ignore that. Focus instead on the growth in the dividend, $1.01 per share, and on the long-term health of the stock, up 60% in Easterbrook’s term despite recent broad market downdrafts that have sent it from $178 per share to its present price of $161 per share.
When you think like a corporate owner, you will see those downdrafts as buying opportunities.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.
