By Annie Gasparro
The new chief executive at McDonald's Corp. plans to sell more
restaurants to franchisees and restructure international operations
to cut $300 million in annual costs and create a more nimble
business.
Steve Easterbrook, in a much-anticipated presentation nine weeks
into his tenure as CEO, emphasized the importance of improving
McDonald's food and service as part of his turnaround plan. But the
specifics he served up on Monday mainly concerned changes to its
structure, which he said must be modernized to meet new global
challenges.
"In the last five years, the world has moved faster outside the
business than inside," he said in a 23-minute video. "I will not
shy away from the urgent need to reset this business."
The fast-food giant plans to sell 3,500 of its approximately
36,000 restaurants worldwide to franchisees by 2018--more than the
1,500 it previously planned to sell by 2016. The goal is for 90% of
McDonald's restaurants to be franchised, up from about 81%
currently, a change Mr. Easterbrook said will provide more stable,
predictable revenue.
The CEO also said McDonald's will reorganize its global business
starting July 1 under four segments: the U.S., "international lead
markets" such as Australia and the U.K., "high-growth markets" such
as China and Poland, and a grab-bag of other countries called
"foundational markets." The structure is designed to group markets
that have similar dynamics and challenges, rather than just
geographical proximity.
The restructuring will involve layoffs, primarily overseas,
though Mr. Easterbrook didn't give details. With that, more
stringent spending controls, and reduced outlays as a result of
running fewer company restaurants, McDonald's expects to shave $300
million a year in general and administrative costs, mostly by the
end of 2017.
The more aggressive embrace of franchising follows a widening
trend in the restaurant industry, with many big brands unloading
locations to avoid the volatility of labor and commodity costs.
Though that cuts corporate revenue, it leaves more stable cash flow
from royalties, licensing and property leases, generally with a
higher profit margin.
Over the past decade, McDonald's already has reduced by about a
third the share of Golden Arches outlets it owns, but other
companies have moved more quickly. Earlier this year, Wendy's Co.
said it would sell 500 restaurants to franchisees and aims to own
just 5% of its stores by mid-2016. Burger King, owned by Restaurant
Brands International Inc., has sold off all but about 50 of its
7,400 North America locations.
McDonald's said it's too early to say how its plans will affect
revenue, but that it will expand operating profit margin.
Mr. Easterbrook took over a company struggling with changing
consumer tastes and increased competition at home as well as food
safety issues in Asia and economic slowdowns in parts of Europe. He
already has announced several big changes in its core, U.S.
business, including plans to curb antibiotic use in its chicken
supply and sell premium burgers and other sandwiches.
On Monday, Mr. Easterbrook was blunt about the Oak Brook, Ill.,
company's challenges. "Our business-model strength is enduring," he
said. "But no business or brand has a divine right to succeed. And
the reality is our recent performance has been poor. The numbers
don't lie."
But he didn't go into as much detail as some analysts and
investors had anticipated about further steps to improve food and
service. While outlining plans to return $8 billion to $9 billion
to shareholders this year, as part of a three-year plan through
2016, he didn't detail strategies to fund share repurchases, such
as taking on more debt or spinning off real estate holdings.
"While we are not surprised by the lack of focus on these
options, we sense that some investors were hoping that McDonald's
would change its philosophy in these areas," said R.W. Baird
analyst David Tarantino.
McDonald's shares finished down 1.7% in 4 p.m. trading Monday,
at $96.13.
Some analysts and investors over the years have suggested
McDonald's split its large property holdings into a Real Estate
Investment Trust, which could provide a tax-efficient way to raise
cash for stock buybacks--though risk depriving the company of a
steady revenue stream.
Mr. Easterbrook said that getting McDonald's sales growth back
on track is his priority. "We are aware of discussion around real
estate, around REIT structure," he said. "We'll certainly get back
to you as soon as we have anything meaningful to share."
Mr. Easterbrook, announcing heads of the new global divisions,
said the U.S. would continue to be led by Mike Andres, who took
over McDonald's largest market in October and reorganized the
business to become leaner and closer to the consumer in the way Mr.
Easterbrook describes the goal of the global restructuring.
"Progress will be bumpy and uneven," he said Monday. "But the
U.S. is now on the right path."
Separately, McDonald's announced it's testing delivery at 88
restaurants in the New York City area through Postmates Inc., a
third-party service that has partnered with Chipotle Mexican Grill
Inc. and Starbucks Corp. Postmates also delivers McDonald's food in
Chicago and San Francisco, according to its website, but McDonald's
said those are not part of the formal corporate test, and it is
focused on New York at this time.
McDonald's offers delivery overseas, such as in Singapore, and
it has tested it in the U.S. previously, mainly in markets that
don't have drive-throughs. Burger King has had delivery in New York
and other urban areas for years.
Write to Annie Gasparro at annie.gasparro@wsj.com
Access Investor Kit for McDonald's Corp.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US5801351017
Subscribe to WSJ: http://online.wsj.com?mod=djnwires