McDonald's Franchisees Share Predictions for 2018

  • Industry News January 23, 2018
    flickr: Mike Mozart
    Expect McDonald's to post another strong quarter on January 30.

    As always, McDonald’s upcoming earnings report on January 30 will draw attention from investors and competitors around quick service. Most expect the fast-food giant to post another strong quarter, with Nomura Instinet analyst Mark Kalinowski predicting same-store sales to rise 4 percent in Q4. Kalinowski arrived at that number from a franchisee survey of 26 domestic operators representing 286 locations. The data actually lowered his forecast half a percentage point from his previous estimate, and also revealed some interesting notes moving forward.

    Franchisees estimated fourth quarter same-store sales by region. It broke down like this:

    • Northeast: 4.2 percent
    • South: 1.8 percent
    • Central: 5 percent
    • West: 5.1 percent

    “While McDonald's U.S. business likely outperformed many of its quick-service counterparts during Q4 in terms of same-store sales growth, perhaps consensus expectations for this key business segment may have gotten a touch too high in the near term," Kalinowski said in the note.

    Nomura Instinent also polled the group about the first quarter of 2018. This came to an expected increase of 3.5 percent, broken down as such:

    • Northeast: 3.7 percent
    • South: 0.9 percent
    • Central: 4.5 percent
    • West: 5 percent

    While this survey represents a (very) small sample of McDonald’s footprint (there are 37,000 or so locations worldwide and more than 14,000 U.S. units at the end of 2016), it brought to light some topics of conversation.

    To start, franchisees responded that the new, tiered $1 $2 $3 Dollar Menu is likely to drive sales in the first part of 2018. After that? Some believe it could lower checks and hurt franchisees ability to control menu prices, as well as increase food cost.

    “The $1 $2 $3 Dollar Menu does give customers choices, but it isn't profit-oriented," a franchisee said, according to CNBC.

    The franchisees credited McDonald’s 2017 momentum to its Signature Crafted Sandwiches and McCafe beverages, which is in line with the company’s recent comments. McDonald’s domestic same-store sales grew 3.9 percent in the second quarter, year-over-year, and 4.1 percent in the third. Globally, they were up 6.6 percent and 6 percent, respectively. Guest counts rose 2.1 percent in the previous quarter as well.

    Naturally, this led to some record days on the stock market, and McDonald’s was trading for $176.81 late Tuesday. On January 23, 2017, shares closed the day at $121.38.

    Investors are happy but are franchisees? That was a mixed bag, according to the survey. Some said they felt pressured to adopt the new value menu, as CNBC points out. Adding new equipment, products, and remodeling to the “Experience of the Future” design was a burden for some operators.

    “Owner/Operators around the country are not happy with the huge reinvestments they are forced to do," one franchisee told Kalinowski, as CNBC reported. "Large numbers of operators will be put in financial trouble with the amounts of money they will be spending. Operators are not happy with the company direction but they will not say anything fearful of retaliation. The company [wants] little or no input from operators. The company looks at operators as the problem instead of the solution."

    Some have lauded the changes, however, which undoubtedly drove traffic back into the brand when it was sorely needed. Customer traffic dropped in each of the last three fiscal years before it started to climb in 2017.

    “While it's hard to keep up with all the changes, I think McDonald's is making many of the right moves and we are about to make a quantum leap over our competitors," a franchisee said.

    A topic of contention involves the kiosks, which one franchisee said is missing the real issue, writing, “What good will new buildings be when we cannot deliver service because we are short-staffed. Employee turnover is at an all-time high for us. Our restaurants are way too stressful, and people do not want to work in them.”

    McDonald’s franchise system is growing. More than 90 percent of the company’s 37,000 locations worldwide are franchised. This year, McDonald’s reached its target of refranchising 4,000 restaurants more than a year ahead of schedule after refranchising locations in China and Hong Kong. Over the past three years, McDonald’s has increased its franchised unit ratio from 81 percent to 91 percent of all units.

    That initiative has been a key driver of success under CEO Steve Easterbrook, who first unveiled his turnaround plan in May 2015 after two years of declining sales and profits.

    Since, the company has installed bold menu changes, such as All-Day Breakfast, fresh beef Quarter Pounders, cage-free eggs by 2025, removing artificial preservatives from Chicken McNuggets, eliminating high fructose corn syrup from the buns used on Big Macs, Quarter Pounders, hamburgers, cheeseburgers, Filet-O-Fish, and McChickens.

    There have been other innovations, like mobile order and pay in 20,000 restaurants by the end of 2017, part of McDonald’s “Velocity Growth Plan.” Delivery in 3,500 restaurants this past summer. The Experience of the Future restaurant design, which contains kiosk ordering and table service. McDonald’s planned to reimage about 650 restaurants in 2017 to the design and said it intends to update most of its free-standing U.S. locations by the end of 2020.

    In any system this large, there is likely to be discord between franchisees and its corporate company. But McDonald’s, with its recent financial performance, isn’t going to lack for suitors—both on the investor and operator side. And what will these initiatives look like five years from now? It’s hard to predict given recent history, which shows McDonald’s ability to make widespread changes in a relatively narrow window (perhaps a stressor for many operators). From all sides, January 30 will be another step in a wait-and-see ride for the top earner in foodservice.