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McDonald's new plan to dominate fast food is angering some franchisees

Hayley Peterson
mcdonalds double
mcdonalds double

(Robert Galbraith/Reuters)

McDonald's sales are continuing to improve, but not all McDonald's franchisees are pleased, according to a recent survey.

Nomura analyst Mark Kalinowski expects the company to report a 4.1% increase in US same-store sales for the fourth quarter ending December 2015, based on franchisee responses to the survey.

That would mark McDonald's best quarterly same-store sales performance in four years.

But several operators are complaining that while sales are up, McDonald's aggressive discounting is squeezing their profit margins.

"McDonald's has long left the franchisees behind," one franchisee wrote in response to Kalinowski's survey. "They have unattainable reinvestment requirements, while forcing the system to continue a price war with our competitors. This erodes margin and post-debt cash flow."

Another franchisee wrote: "We are discounting heavily, against my will, so sales should be up and profits down.”

As part of its turnaround plan launched last year, McDonald's is realigning around what it calls a "value platform," which essentially means the company is planning to offer more promotions.

McDonald's kicked off this effort in January with the "McPick 2," a limited-time deal that lets customers select two of the following items for $2: a McDouble, a McChicken, small fries, and mozzarella sticks.

McPick 1
McPick 1

(Hollis Johnson)
The "McPick 2" lets customers select two of the following items for $2: a McDouble, a McChicken, small fries, and mozzarella sticks.

The promotion, which started January 4, returns sandwiches to the $1 price point of the Dollar Menu.

McDonald's reformulated the Dollar Menu two years ago by axing the $1 price ceiling and turning it into the "Dollar Menu and More" with items that cost up to $5.

The shift upset some customers.

"Some of the challenges we've had in the US have been somewhat self-inflicted," McDonald's CEO Steve Easterbrook said during a conference call in July. "We moved away from the Dollar Menu and didn't replace it with significant-enough value in the eyes of consumers."

While the new discounts are good news for consumers, they are pushing some franchisees to their limits.

"I am very alarmed about the discounting push," one franchisee wrote. "I have never seen the corporation be so aggressive with discounts. The regional marketing teams are adding numerous other discounts to the McPick 2, primarily breakfast items. They are encouraging, quite literally, everything being on sale. This is a very hard cultural adjustment for me."

Another wrote: "McPick 2 for $2 must die."

For the survey, Kalinowski interviewed 26 domestic franchisees with about 209 restaurants. That's a small slice of McDonald's more than 14,000 restaurants in the US.

McDonald's spokeswoman Lisa McComb said customers love the McPick 2 promotion, and that's what matters most.

"McDonald’s franchisees agree that listening to our customers matters most, and they love the promotion," she said. "In fact, we’ve seen an increase in key customer measures of our brand, including overall satisfaction and overall value, since we launched McPick 2. We’ll continue to focus on initiatives that resonate with our customers."

Big Mac
Big Mac


Some franchisees complained that the deals go against McDonald's CEO Steve Easterbrook's plan to turn the chain into a "modern, progressive burger company."

"How can we make McDonald's 'modern and progressive' when all we are doing is going back to the 2002 promotional prices and again selling sandwiches for $1 each?" one franchisee wrote.

Another said: "We will never have a successful line of customized, premium-priced sandwiches as long as we are so focused on selling $1 sandwiches."

Overall, however, business is getting better for McDonald's.

Franchisees expect same-stores sales to increase by 3.8% in the first quarter of 2016, according to the survey.

When asked to rate their six-month outlook for the business on a scale of one to five, with five being excellent, the average response was 2.84. That's up from the response of 1.96 that was received in the October 2015 survey.

"Overall we are making progress on all fronts," one franchisee wrote. Another said, "The momentum has been more positive in recent months."

NOW WATCH: We tried the new value menus at McDonald's, Burger King, and Wendy's — and the winner is clear

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