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Survey: McDonald’s operators report weakening finances

Survey: McDonald’s operators report weakening finances

Analyst’s quarterly franchisee survey suggests operators’ relations with company diminishing

Franchisees of McDonald’s Corp. say their sales are still weak and that it will take many months for the company to get back on the right track, according to the latest survey from restaurant industry analyst Mark Kalinowski.

Operators in the survey reported a weak outlook, diminished relations with the corporation and financial weakness brought on by years of renovations and equipment upgrades — and worsened by rising labor costs.

“It is going to take months for us to comp against these negative numbers,” one operator wrote. “We are trying to overcome years of double digit increases driving top-line sales for a corporation that wasn’t planning long term and for that matter still isn’t.”

Said another: “My numbers are not good due to new competitors. Overall, sales are still in a slump and I don’t see much to get excited about in 2015.”

Operators said their same-store sales in June declined 2.3 percent, which would indicate that the company’s second quarter sales are lower than many Wall Street analysts expect.

Operators do expect same-store sales will be better this month — but still negative. Operators expect their July same-store sales will fall 1.2 percent.

“They continue to struggle in the U.S.,” Kalinowski said in an interview. “McDonald’s is a big market share donor to the industry.”

The quarterly survey talks with 29 franchisees that operate more than 200 restaurants. It is therefore not a representative sample, given that the chain has 3,000 franchisees and 14,000 domestic locations.

Still, the survey does provide at least an indication of where sales are headed, and its predictions of sales have generally been in the ballpark. The survey also provides a snapshot of operator sentiment and franchisees’ views of the company’s initiatives — and certainly which direction that sentiment is headed.

That sentiment is currently worsening. On a scale of one to five, with one being poor, operators’ six-month outlook averaged 1.69, the worst showing in the survey’s 12-year history.

Franchisees also rated their relations with the corporation at 1.45, lower than the 1.48 of the previous survey, and well below the average of 2.1.

McDonald’s is trying to reverse three years of weakening sales. “Sales trends tend to affect the mood of any franchise business,” Kalinowski said. “Funny how your mood changes as your sales change.”

Operators in the survey painted a dim picture of franchisees’ financial wherewithal and their ability to expand. Most franchisees in the survey indicated that less than half of operators could be considered “financially expandable.”

“The operators sit on a cliff right now,” one franchisee wrote. “With sales going in the wrong direction, all must be conservative in our decisions. It will only take one bad decision to put any operator down and out.”

Said another: “At least half of the operators in my region are on the verge of collapse. With minimum wage for fast-food workers potentially increasing to incredibly high levels, we are facing a crisis situation.”

One operator, in fact, suggested that lenders are less confident in McDonald’s future. “For the first time ever I had to provide a complete financial review by my lender when my loan will be paid off in less than a year,” the operator wrote. “It seems they are very concerned about the financial condition of the operators.”

Franchisees also expressed frustration with some of the company’s recent moves, saying that the efforts appear aimed more at shareholders than franchisees. The company recently reorganized its operations, cutting $300 million in general and administrative costs. It is also refranchising more locations. That said, the company is resisting one shareholder demand: A spinoff of company real estate.

“I still think I’ve been working for the greatest brand in modern history,” one franchisee said. “However, the level of frustration has continued to be fueled by the constant reminder that I really have absolutely no control over my destiny because my opinion doesn’t warrant anything if it differs from that of the machine that is corporate McDonald’s, their stockholders and the board, all of which care little about long-term viability and far too much about personal short-term gains.”

Said another: “They don’t care about us, they care about shareholders!”

A few franchisees suggested that the rash of bad news and negative media coverage is feeding into a negative perception of the brand, driving sales lower.

“There is nothing on the menu that excites our customers,” a franchisee said. “Way too much negatives in the media that sways opinions.”

“Nothing is changing and McDonald’s bad news continues to hit the airwaves almost every day,” another wrote.

All that said, some operators said that things are getting better. And another said this:

“Can’t stay down forever.”

Contact Jonathan Maze at [email protected]
Follow him on Twitter: @jonathanmaze

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