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McDonald's (MCD) Slumps on Lower Franchisees View - Analyst Blog

McDonald's Corp.’s MCD troubles seem to be mounting by the day. The fast food chain, burdened with declining comps, is currently facing some unrest among its franchisees, per the latest franchisee survey from Janney Capital Markets analyst, Mark Kalinowski. In response, McDonald’s shares declined 1.2%.

Janney Capital Markets reviewed about 25 franchisees that own a total of about 215 U.S. McDonald’s restaurants. These respondents rated the outlook for the company’s U.S. business over the subsequent six months as between poor and fair. This opinion resulted in a rating of 1.81 out of 5 on Kalinowski’s scale, which is apparently the worst for McDonald’s U.S. business in the survey's 11-year history.

The primary bone of contention among the franchisees is the company's turnaround plan recently announced by the new CEO Steve Easterbrook.

In fact, Easterbrook has promised to improve the food quality, customer experience, employee benefits and brand image in an effort to turn the company around. Although the company’s turnaround efforts have won praise from analysts, franchisees have raised concerns about the escalating costs they will have to incur as a result.

Just after his appointment, management announced plans to discontinue the use of chicken raised with antibiotics that are important for human medicine within the next two years. (Read: Will Antibiotic-Free Chicken Revive McDonald's Fortunes?).

Also, the company is reportedly planning to add kale to its menu this year to cater to its health conscious consumers. (Read: McDonald's Going Healthy by Adding Kale to Menu?). Further, the “Create Your Taste” platform launched by the company to counter competition from the fast casual restaurants failed to impress the franchisees.

Meanwhile, McDonald's announced that it will provide improved benefits for employees at its company-owned restaurants, including a wage increase along with paid time-off for full and part-time employees. These benefits will be effective Jul 1 for 90,000 employees at about 10% of McDonald's restaurants in the U.S. (Read: McDonald's to Offer Wage Hike, Paid Leaves & College Aid). The wage increase, in particular, has not gone down well with the franchisees. While the wage hike applies only to the company-owned units, some have expressed concern that it will pressure franchisees to follow suit, thus denting their profit margins.

Franchisees operate nearly 90% of McDonald’s total U.S. locations, and thus form an important part of the brand’s success in its important markets. We believe that the latest pessimism surrounding the burger giant’s U.S. business would further dent its reputation.

McDonald's currently carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the same industry are Cracker Barrel Old Country Store, Inc. CBRL, Darden Restaurants, Inc. DRI and BJ's Restaurants, Inc. BJRI. All these stocks sport a Zacks Rank #1 (Strong Buy).

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