MCD McDonalds Corp

By Julie Jargon 

McDonald's Corp. is in the business of selling food quickly, but it has been slow to many industry trends, including transferring ownership of its restaurants to independent operators -- an easy way to derive stable revenue.

The burger giant, which just announced plans to sell a stake in its China business and is inviting bids for a stake in its Japan business, is playing catch-up with other restaurant companies that began shedding assets years ago.

It wasn't until November 2015, when the company was under pressure from investors to do something dramatic to boost its balance sheet such as spin off its real estate holdings, that it increased the number of restaurants it plans to sell to 4,000 by the end of 2018 from an earlier target of 3,500. McDonald's has set a long-term target of being 95% franchise-owned from 83% now.

The model is attractive because it allows a restaurant company to expand into new markets without having to put up the capital. It reduces the company's exposure to wage-related pressure and employee organizing efforts and provides a stable revenue stream through the royalties it collects from franchisees.

McDonald's is two years into a turnaround plan that was instituted following its longest sales slump -- and subsequent share decline -- in a decade that was caused in part by the migration of customers to rivals serving healthier food. If McDonald's had handed over ownership of more restaurants to franchisees sooner, it could have helped solidify its finances and kept shareholders happy while it worked on improving other aspects of the business.

Changing restaurant ownership at a company as large as McDonald's, which has 37,000 restaurants around the world, is hard to do.

However, sandwich chain Subway, owned by Doctor's Associates Inc., has nearly 45,000 restaurants around the world and all of them are franchised.

Meanwhile, direct competitor Burger King, a unit of Restaurant Brands Inc., began an aggressive push to sell off company-owned restaurants after Brazilian investment firm 3G Capital Partners LP bought it in 2010. The mostly franchised model of Canadian doughnut maker Tim Hortons made that company an attractive target and Burger King bought it in 2014.

CKE Restaurants Inc., owner of Carl's Jr. and Hardee's, was also an early adopter of the so-called "asset-light" business model. Nearly 95% of its more than 3,700 restaurants are now owned by franchisees. Dunkin Brands Group Inc. has long been nearly 100% franchise-owned.

Experts say that McDonald's has been slow to change in various other ways. The company hasn't updated its menu quickly enough to be in line with changing consumer tastes. For example, it added Angus burgers and sandwiches made with Sriracha sauce long after those ingredients were popular.

A McDonald's spokeswoman said that since Steve Easterbrook took over as chief executive, the company has been focusing on "taking immediate steps" to help growth and strengthen the bottom line, which includes restructuring the business and finding strategic partners.

At times, McDonald's has read consumer demand relatively well. The chain instituted all-day breakfast in October 2015 after just six months of testing it. And it was an industry leader on switching to cage-free eggs.

But there haven't been any new major menu items in a while and the company has been slow to address problems with its burger quality.

The company only recently began testing an app that will allow customers to order and pay for food with their phone, lagging many others in the industry, and it was late to become involved in social media -- years behind other major restaurant chains and retailers.

McDonald's has digital media hubs in Singapore, London, and Oak Brook, Ill., but as recently as two years ago, McDonald's had no way to consistently track and respond to what is being said about it online, a lost opportunity for a brand that gets mentioned on social media every one to two seconds.

"Their philosophy has been to be more of a follower than a leader," said David Tarantino, a restaurant analyst at R.W. Baird & Co. "In the past the organization had a lot of layers of management and decision making that may have impeded the speed at which they could have implemented new ideas."

Mr. Easterbrook, who is approaching his second anniversary at the helm, has been trying to change that.

The company has eliminated many corporate positions as part of a plan to reduce administrative expenses by $500 million by the end of 2017, and he has been pushing management to let go of what he calls "legacy thinking." He has hired an outsider to run the U.S. business. Mr. Easterbrook told investors in June that "when the pace of change in the world outside is quicker than the pace of change within, you start to get left behind."

Write to Julie Jargon at julie.jargon@wsj.com

(END) Dow Jones Newswires

January 12, 2017 12:52 ET (17:52 GMT)

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