McDonald’s Corp. same-store sales fell 2.1 percent in December, and don’t seem to be improving in January, according to the latest franchisee survey by Janney Capital Markets analyst Mark Kalinowski.
Surveyed franchisees estimated that January same-store sales would likely fall 1.7 percent, an early indication that McDonald’s efforts to reverse sales trends may not yet be taking hold.
“We are somewhat surprised by the feedback we’ve received by franchisees regarding their expectations for January, as recent changes by McDonald’s — perhaps most notably to advertising — don’t seem to be generating any meaningful near-term lift in sales trends,” Kalinowski wrote in a note Wednesday.
McDonald’s is coming off what has arguably been its worst year for U.S. operations in company history, and certainly in recent decades. The company reports its full-year results before the market opens Friday, and is widely expected to report its first decline in domestic systemwide sales in decades.
The Oak Brook, Ill.-based operator’s U.S. same-store sales fell every month of 2014, with the exception of April, when sales were flat. The results include a 4.6-percent decline in November, McDonald’s worst monthly performance in more than a decade.
The company is working on a lengthy list of efforts to reverse those trends, beginning with marketing changes that respond to critics, increase transparency and promote key menu items like the Big Mac, breakfast and Happy Meals. McDonald’s also wants to simplify the menu, give more regional control over some products and add a customization platform called “Create Your Taste.”
Kalinowski’s survey polled operators of 198 locations. More often than not, operators’ same-store sales results prove to be optimistic, as actual sales results typically come in lower than the survey predicts. Operators in the previous survey said same-store sales fell 3.6 percent in September, while the actual result was a 4.1-percent decline.
A 2.1-percent decline would be a 250-basis point improvement over November, but it would still be disappointing considering the current operating environment. Many quick-service chains, including Popeyes Louisiana Kitchen and Sonic Drive-In, have reported strong late-year sales buoyed by lower gas prices and rising employment.
Kalinowski’s survey also provides a window into operators’ views on various company efforts. Those opinions have grown more pessimistic over the past year as sales have weakened, and this survey was no exception.
“We just have no momentum any more,” one operator said in the survey. “Fortunately, I have high-volume stores so even with a little lost traffic, I’ll be OK. But I’m concerned about those owner/operators who are keeping unprofitable stores open just so Oak Brook can continue to collect their rent and service fees.”
Another said, “Sales decreases are the new norm.”
Operators provided some ideas on what they think McDonald’s should target in its effort to simplify the menu. Franchisees have been complaining for some time that a decade of new product additions has made the menu unwieldy and complicated, which they say has slowed service.
Many franchisees suggested that McDonald’s eliminate espresso drinks from its McCafé menu. Premium McWraps were another popular target for elimination, with many saying they are complicated to make. A number of franchisees also suggested simplifying Happy Meals.
“Happy Meals are a chore to ring up with all the options,” one franchisee said. “Perhaps corporate should make a decision on what a Happy Meal is and stop complicating the choices.”
Franchisees paint dim picture
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Another operator said the company should focus on core products. “The majority of sales still comes from just five items, so capitalize on that and the rest is a distraction.”
Many operators said they are not happy with the pace of simplification, saying that it’s not fast enough. Some are skeptical it is happening at all.
“Significant menu simplification is not happening as far as I can tell,” one franchisee said. “Any operator could have, and many did, say that this needed to happen two years ago. Everyone who is paying attention, both inside and outside of McDonald’s, recognizes this as a problem, but nothing changes.”
Another said, “Not going to happen.”
Franchisees painted a dim picture for the next six months. On average, franchisees rated their outlook 1.88 on a scale of one through five, with five being “excellent” and one being “poor.” No franchisees rated their outlook as “excellent” or “very good.”
“Operator morale is at the lowest I’ve seen in over 20 years and the decision makers seem to be intent on making it more and more difficult to be successful,” one franchisee said. “Morale is low because nobody gets it, profitability [is bad], the short- and long-term outlook is dim. We keep just adding more [crud] and making stupid decisions pandering to nonsense studies on pop culture.”
Some franchisees also suggested that layoffs at the company’s corporate headquarters are having an impact on morale within the company. “At the end of the month, all of the McDonald’s employees have a 15-minute meeting to find out if they have a job or not,” one said. “They may be put in another position and have no choice but to accept it or quit.”
Contact Jonathan Maze at [email protected].
Follow him on Twitter: @jonathanmaze