It appears that McDonald’s Corporation (NYSE:MCD) franchises are not in a good shape based on a survey conducted by the restaurant industry analyst, Mark Kalinowski. The outlook for the franchisees for the six-month period is at life-time low. That is undoubtedly a bad news for the principal company considering that it is planning to increase the number of franchisee stores to 90% in the next two years.
Survey Results
The survey covered McDonald’s Corporation (NYSE:MCD)’s 29 franchisees since they own, as well as, operate 208 restaurants collectively in the United States. They were asked to provide an outlook for the next month with a rating ranging from poor to excellent, i.e. between one and five. Accordingly, the average response recorded was 1.69 only, which is the lowest in the 12-year history of the survey. The earlier lowest rating was 1.81 that was recorded three months back.
The survey assumed importance in the wake of 2.3% drop of the 29 franchisees’ same-store sales in June. The analyst said that it was two percentage points below than the expectations of the Wall Street. Additionally, the franchisees are expecting sales to drop 1.2% in the current month, which was contrary to the analysts’ expectations of sales increase.
Competition Hurts
One of the franchisees of McDonald’s Corporation (NYSE:MCD) told the analyst that new competitors hurt its sales. The franchisee also said that the sales are slumping still and there is no chance to get excited about the current year. Another franchisee said that at least 50% of them in the region were on the verge of a collapse. The franchise told the analyst that they were facing a crisis since the minimum wages were also increasing incredibly.
McDonald’s Corporation (NYSE:MCD) would not have liked to hear such bad comments from its franchisees since it is planning to own only 10% of the total stores leaving the rest to the franchisees. However, the company said that the survey was based on less than 1% of the franchisees since there are more than 3,000 restaurants owned by them. Still, the company indicated it valued the franchisees feedback.
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McDonald’s Corporation, incorporated on December 21, 1964, operates and franchises McDonald’s restaurants. McDonald’s global system comprises both Company-owned and franchised restaurants. The Company manages its business as distinct geographic segments: the United States (U.S.); Europe, and Asia/Pacific, Middle East and Africa (APMEA). The Company’s operations in Canada and Latin America, as well as its Corporate activities are reported under Other Countries & Corporate. The Company’s restaurants offer a substantially uniform menu, although there are geographic variations to suit local preferences and tastes. Its menu includes hamburgers and cheeseburgers, Big Mac, Quarter Pounder with Cheese, Filet-O-Fish, several chicken sandwiches, Chicken McNuggets, wraps, French fries, salads, oatmeal, shakes, McFlurry desserts, sundaes, soft serve cones, pies, soft drinks, coffee, McCafe beverages and other beverages. In addition, the restaurants sell a variety of other products during limited-time promotions. The Company’s restaurants in the United States and many international markets offer a full or limited breakfast menu. Breakfast offerings may include Egg McMuffin, Sausage McMuffin with Egg, McGriddles, biscuit and bagel sandwiches, and hotcakes.
McDonald’s franchised restaurants are owned and operated under one of the following structures: conventional franchise, developmental license or affiliate. Under a conventional franchise arrangement, the Company owns the land and building or secures a long-term lease for the restaurant location and the franchisee pays for equipment, signs, seating and decor. Franchisees are also responsible for reinvesting capital in their businesses over time. The Company’s typical franchise term is 20 years. Conventional franchisees contribute to the Company’s revenue through the payment of rent and royalties -based upon a percent of sales, with specified minimum rent payments, along with initial fees paid upon the opening of a new restaurant or grant of a new franchise.
Under a developmental license arrangement, licensees provide capital for the entire business, including the real estate interest. The Company does not invest any capital under a developmental license arrangement. The Company receives a royalty -based upon a percent of sales , as well as initial fees upon the opening of a new restaurant or grant of a new license. This structure is used in over 70 countries with a total of approximately 5,228 restaurants. The largest developmental licensee operates approximately 2,100 restaurants in 19 countries in Latin America and the Caribbean.
The Company also has an equity investment in foreign affiliated markets, referred to as Affiliates. In these markets, the Company receives a royalty -based on a percent of sales. The largest of these affiliates is Japan, where there are nearly 3,100 restaurants.
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