Last year, investment management and capital markets firm Janney Montgomery Scott downgraded stock in McDonald’s from a buy to a neutral rating. This type of move is a daily occurrence on Wall Street, but for the fast-food giant, it was another matter. McDonald’s first-quarter results had shown a 1.2 percent decrease in U.S. same-store sales and a 1 percent drop globally. Bad news, especially since a 1.8 percent decline in October 2012–the company’s first negative-growth month in nine years–led to the ouster of the president of McDonald’s USA and rattled the burger behemoth’s confidence.
Missing earnings estimates and month-over-month sales goals is bad enough. But another reason the Big Mac and its stock took a shellacking was an April report by Janney analyst Mark Kalinowski, who monitors many of the big players in the restaurant industry. His proprietary McDonald’s Franchisee Survey is one of the most influential documents affecting the company’s stock.
Franchisees (whose survey opinions are presented anonymously) complained that the new McWraps, while popular with customers, were “an operational nightmare” and were increasing service times. They also complained that the Dollar Menu and coupons were cutting deeply into franchisee profitability.
A follow-up survey in October 2013, after third-quarter revenue had returned to normal, seemed just as gloomy. “New product introductions don’t seem to interest customers anymore,” one franchisee said. “Maybe we’ve overdone it. It seems we are wasting millions on advertising and getting nothing for it.” Another lamented, “McDonald’s has reached its apex.” Janney and other analysts remained neutral on the stock.
That’s pretty strong criticism, especially coming from insiders. But McDonald’s, which has been a public company for decades, probably can weather it. However, for other franchises, the thought of public ownership–with shareholders, analysts and a ravenous financial media probing for soft spots, and franchisees growling when their profits are balanced on the back of quarterly earnings–is a daunting proposition. Good thing most of them will never have to deal with it: By some estimates, only about 1 percent of franchise systems ever go public–mainly because the business model, in which franchisees front most of the cash needed for growth, alleviates the need for a mass cash infusion brought about by an IPO.
McDonald’s franchisees seem to be frustrated with the company’s expansion of its value menu — the Dollar Menu and More was revamped in November to include more offerings priced up to $2.
According to the 61st McDonald’s Franchisee Survey by Janney Montgomery Scott analyst Mark Kalinowski, and reported by Burger Business, many operators said they’re unhappy with the effects the expanded value menu is having on check averages (lower), service (slower) and kitchen operations (more complicated).
One survey respondent noted that there are 25 breakfast and lunch items on the Dollar Menu and More, and asked why a customer would order anything else. Another operator added that they are now selling more of these value menu sandwiches, and less large, higher-priced sandwiches.
“Our menu has gotten too big. We are trying to do too many things and our service and quality suffer,” another operator observed.
According to the author, McDonald’s is trying to improve kitchen operations with a “High Density Kitchen,” now in test. Kalinowski said the solution includes more refrigerated and heated holding trays to “accommodate the expanded menu.”