McDonald’s Corp.’s operator outlook is the worst it has been in more than a decade, and so is the franchisee relationship with the company, according to the latest survey from Janney Capital Markets analyst Mark Kalinowski.
The franchisee survey provides a grim picture of McDonald’s sales ahead of its quarterly earnings report next week, and suggests that early turnaround efforts have not yet taken hold.
“McDonald’s system is broken,” one operator said in the survey. “They talk menu reduction to help our people, simplify our menu for customers, but add products to help sales and it does not work. We continue to fall and fail.”
The survey includes 32 operators who own 215 restaurants, a small fraction of the 3,100 franchisees in McDonald’s U.S. system. In a statement, McDonald’s referenced the small sample size.
“Approximately 3,100 franchisees own and operate McDonald’s restaurants across the U.S. Less than 1 percent of them were surveyed for this report. We value the feedback from our franchisees and have a solid working relationship with them,” the company said in a statement.
Still, the operators in the survey indicate that March wasn’t a good month from a sales standpoint. Franchisees in the survey said same-store sales fell 3.7 percent, only a slight improvement from the 4-percent decline in February.
Franchisees did not seem confident in a quick turnaround, either. On a scale of one to five, with one being “poor” and five being “excellent,” operators’ six-month outlook averaged 1.81, the lowest score in the history of the survey. The figure was lower than the 1.88 score from three months ago, and well below the average of 2.8.
Additionally, operators’ relationship with the franchisor has turned sour. Only three characterized their relationship as “good,” and the vast majority, 16.5, called their relationship “poor,” the lowest score on the one-to-five scale. No surveyed operators called the relationship “very good” or “excellent.”
Their responses to that question averaged 1.48, well below the survey average of 2.1, below the 1.67 score from three months ago, and the lowest rate in the history of the survey.
“In general, we argue that corporations who have franchisees on board and are enthusiastic about senior management’s plans/strategy tend to fare better than those that don’t enjoy this type of a situation,” Kalinowski wrote.
The results suggest that operators aren’t yet buying into many of the company’s efforts to turn around sales and get the brand on stronger footing.
Surveyed franchisees were also negative on the company’s recent Turnaround Summit in Las Vegas. “The Turnaround Summit was a farce,” one operator wrote.
“The ideas presented — such as Create Your Taste — do not fit our business model. McDonald’s has jumped the shark. The problem is an unwieldy menu (too big) and trying to be all things to all people. The suits in Oak Brook still don’t get it. And we need operations people in charge. And a new, younger and geographically diverse board of directors, not the geriatrics we have.”
Operators suggested they would need to see sales improve soon if they were to go along with some of the company’s efforts. Several operators were upset about McDonald’s recent decision to increase pay by $1 an hour above minimum wage at company units.
“If sales don’t go up significantly and we don’t get some McDonald’s relief, operators will not want to do remodels, double drive-thrus, or go along with this new program,” one wrote. “Now that (McDonald’s company stores) screamed out to the world that they were going up a dollar now and will go to paying $10 an hour beginning in 2016, we will be expected to do the same. Watch for $5 Big Macs, etc. and Extra Value Meals in the $8 to $10 range. See most of the Dollar Menu go away. The dollar drink any size will have to go. McDonald’s will have to change from the low-cost leader to something else.”
Another called the pay increase “embarrassing.” “Even the (Fight) for $15 didn’t like it,” one operator wrote.
“The recent announcement regarding McDonald’s decision to pay their employees [more] sent a wave through the operator community,” another franchisee wrote. “It left the operators feeling betrayed and less of a partner. An already-strained relationship was fractured and I don’t know if they can recover.”
This story has been revised to reflect the following update:
Update: April 15, 2015 This story has been updated to include a response from McDonald’s Corp.