McDonald’s turnaround plan fails to excite markets

McDonald’s new chief executive has said he would reorganise operating units, sell more restaurants to franchisees and cut costs in a bid to turn the fast-food chain into a “modern, progressive burger company”.

The much-anticipated video announcement by Steve Easterbrook left investors hungry for specific details on how the world's biggest restaurant chain would improve food quality and speed up service.

“I will not shy away from the urgent need to reset this business,” said Easterbrook, who took the helm on March 1st, following one of McDonald’s most dismal years on record.

Shares were down on the New York Stock Exchange as investors digested the news. The stock had dropped nearly 2 per cent in premarket trading.

The turnaround plan offered many of the corporate fix-up standards: a leadership reorganisation, cost cuts and plans to return cash to shareholders. Yet investors were hoping for more.

While analysts said the moves were steps in the right direction, Easterbrook’s presentation lacked more radical changes such as splitting off McDonald’s land holdings.

“The market expected more,” said Asit Sharma, an analyst at the Motley Fool. “Easterbrook set the expectation that he would present a novel solution to McDonald’s woes” and instead delivered changes that “could have been announced on a quarterly earnings call”.

To snap the sales malaise that got his predecessor ousted after less than three years as chief executive, Easterbrook is revamping the company’s leadership into four segments of similar markets.

Focus

One will focus on the US, another will oversee countries such as Canada and France, where McDonald’s is well-established. Yet another will manage markets such as China and Poland, where the chain is growing more quickly. The final unit will oversee the other 100 countries where McDonald’s operates, a segment Easterbrook is calling Foundational Markets.

McDonald’s organises its business around major geographic markets: the US, Europe, and Asia/Pacific, the Middle East and Africa.

While the new structure is mostly targeted at improving performance, Easterbrook also says it will help cut $300 million in general and administrative costs by the end of 2017.

“Judging by the immediate investor reaction, there appears to be more of a ‘prove it’ sentiment among investors, rather than an full embrace of Mr Easterbrook’s plan,” Miller Tabak analyst Stephen Anderson said.

Franchisees

Easterbrook said McDonald’s will sell 3,500 restaurants to franchisees by 2018, taking global franchisee ownership to 90 per cent from 81 per cent. McDonald’s prior plan called for selling 1,500 restaurants to franchisees by 2016.

He vowed to remove “cumbersome” management and scour the business for inefficiencies. Those moves are expected to result in about $300 million in net annual savings, most of which will be realised by the end of 2017. Easterbrook also said McDonald’s would return $8 billion to $9 billion to shareholders in 2015.

Missing from the announcement, however, was an update on how much debt the company is willing to take on as it funnels that cash to shareholders, said Will Slabaugh, an analyst at Stephens.

The other disappointment for McDonald’s watchers was a lack of detail on the operational changes the company is planning to make. How does it plan to speed up service? Will it continue simplifying its menu? Does it see a way to capture younger customers seeking higher-quality ingredients? Will McDonald’s ever sell breakfast all day long? Easterbrook’s “proposed solutions like ‘more customer-focused business’ need to be better defined,” Sharma said. “The market isn’t satisfied with broad identification of problems and proposed solutions. His predecessor did just that.” – (Reuters/Bloomberg)