This post is part of the Reporter’s Notebook blog.
Yesterday, we wrote about Mark Kalinowski’s quarterly survey of McDonald’s Corp. franchisees, which are increasingly unhappy with the state of things.
This is no surprise. While franchisee relations can get testy even in the best of concepts, in general they’re testier in concepts with declining sales, and easier in concepts with improving sales.
But adding to the concern this time was an apparent belief among many franchisees that the brand is only concerned about shareholders. “They don’t care about us, they care about shareholders!” one wrote. “Know this fact and act accordingly.” That wasn’t an uncommon sentiment.
The funny thing is that many shareholders don’t think McDonald’s cares about them enough.
This is one of the biggest challenges that McDonald’s faces. It walks a tightrope between satisfying shareholders and keeping its large franchisee base happy.
Each of these constituents can be difficult to please and can make life miserable for executives and board members even in good times. But they can have fundamentally different demands. Franchisees are generally in it for the long term. Many shareholders are, too, but not always.
As the chain has struggled over the past couple of years, the complaints of these different constituents have grown louder and more vocal. And McDonald’s is under pressure to satisfy them both.
In theory, both want the same thing: Higher sales and profits. But shareholders also want a higher stock price. And so they sometimes push ideas that have to do a lot with stock price and almost nothing to do with the revenue generation a brand needs.
The best example of this is real estate. Some shareholders have long demanded that McDonald’s spin off its vast real estate holdings. Real estate companies on Wall Street trade for much greater multiples than do restaurant companies that aren’t fast-casual chains out of New York City. McDonald’s doesn’t get the credit for its real estate. Spinning it off would accomplish that goal.
Selling or keeping real estate will not sell any more Big Macs. But franchisees vehemently oppose the idea of a spinoff — even though they pay rents of around 14 percent of revenues. They don’t like the potential addition of a third party into their close relationship with the franchisor.
And McDonald’s for years has resisted the suggestion, because keeping its real estate and collecting those rents benefits the company over the long-term.
To be sure, the best thing for McDonald’s at the moment would be to string together a couple of quarters of sales growth. It’s amazing how fast complaints get quieted after a quarter in which same-store sales rose 5 percent.