McDonald’s (MCD) newly minted Chief Executive Steve Easterbrook took the wraps off its turnaround plan today.
The fast food giant is looking to revive sliding sales and profits by franchising more restaurants, reorganizing its structure and cutting costs.
"Today we are announcing the initial steps to reset and turn around our business," Easterbrook said in a press release. "As we look to shape McDonald's future as a modern, progressive burger company, our priorities are threefold - driving operational growth, returning excitement to our brand and unlocking financial value."
Yahoo Finance’s Aaron Task says the big challenge for McDonald’s will be changing customer’s tastes, especially the millennial generation.
“They [Millenials] would rather eat at Chipotle (CMG) or other places where they have a perception that the food is better sourced and better for them and they're willing to pay a higher price for it," Task notes. “Also McDonald's has saturated the market here in the United States, so it's not like anyone's all of a sudden waking up and discovering there's this place called McDonald's and I want to go check it out. Everybody knows what McDonald's is, or at least has in their mind what they what they think McDonald's is, and for an increasing the number of younger Americans especially they think it's something that they want to avoid, which is a huge problem for McDonald's."
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Mr. Easterbrook did not offer specific details on improving food quality or service in his 23-minute video announcement. However, the world’s biggest fast-food chain is already experimenting with all-day breakfast and is rolling out new menu items, such as the artisan grilled chicken and sirloin burger.
As part of its strategy, McDonald's will speed up refranchising to include 90% of the chain's more than 36,000 locations worldwide by 2018 to produce “more stable and predictable cash-flow,” said Easterbrook. Currently 81% of restaurants worldwide are owned and operated by franchisees.
“He wants to do refranchising, which is basically means that McDonald's right now owns almost 20% percent of the stores and they want to get that number down to around 10%. By comparison, Burger King only owns 1% percent of its stores. So McDonald's has a long way to go there,” according to Task.
McDonald’s will also restructure its business around four major geographic markets: U.S.; international lead markets, including Australia, Canada, France, Germany and the United Kingdom; high-growth markets with higher restaurant expansion and franchising potential, including China, Italy, Poland, Russia and four other countries, and foundational markets which has the potential to operate under a largely franchised model.
The organizational changes to the corporate structure will deliver about $300 million in cost-cutting, most which will be realized by the end of 2017, but it was not clear how many jobs it would impact.
McDonald’s reported an 11% drop in revenue and 30% decline in profit for the first three months of the year and plans to close about 700 restaurants.
“The reality is, our recent performance has been poor. The numbers don’t lie,” Easterbrook pointed out in the video detailing the turnaround.
Investors weren't impressed with the turnaround details and seemed to be looking for more than just organizational changes. Task says the Street was looking for what McDonald’s is going to do with the real estate it owns.
“There are some people out there who think McDonald's should take its real estate assets and convert them into a REIT structure. That would unlock a lot of value...I suspect that isn't in the cards today but maybe that's something he's going to keep in his back pocket in case this turnaround plan doesn't materialize,” he says.
Wall Street will get more insight on the company’s performance on Friday when it releases monthly sales figures for April and later this month at its annual shareholder meeting on May 21st.
