According to Bloomberg, MCD told its franchisees in an internal memo to seek alternate means of financing after Bank of America declined to increase funding. The article states that Bank of America won’t provide more money as it works on the planned purchase of Merrill Lynch. This tightened access to capital will have implications on the entire industry because if McDonald’s franchisees are having difficulty obtaining necessary financing, I can’t imagine the trouble KFC franchisees are having.
Within the memo, MCD’s Treasury Department says, “Bank of America has been taking steps to increase capacity to fund additional growth….Its announcement last weekend of its intention to acquire an investment bank and the volatility in the debt markets, especially this past week, have impacted B of A's ability to get the quick solution originally anticipated.''
This memo reaffirms my view that MCD will not be able to complete its planned coffee conversions by the middle of the next year. Based on my math (please refer to my September 17th post titled “MCD – Coffee Could be the Tipping Point!” for more details), even if MCD accelerates the conversion process in 2H08, the total number of McDonald’s stores with the ability to sell specialty coffee in the U.S. would be 2,800, which only accounts for 25% of MCD’s U.S. system. The fact that franchisees are now facing additional hurdles to obtain the necessary financing to upgrade its stores (at a time when cash flows are already under pressure from increasing commodity costs) will only further delay this conversion process. For reference, MCD will invest up to 40% of the remodel cost, which on average can range up to $75K, and the operator will be responsible for current equipment costs of approx $25K. That being said, based on the article and MCD’s comments at a recent Bank of America conference, management maintains the beverage rollout is still progressing as planned, but I remain unconvinced.
Within the memo, MCD’s Treasury Department says, “Bank of America has been taking steps to increase capacity to fund additional growth….Its announcement last weekend of its intention to acquire an investment bank and the volatility in the debt markets, especially this past week, have impacted B of A's ability to get the quick solution originally anticipated.''
This memo reaffirms my view that MCD will not be able to complete its planned coffee conversions by the middle of the next year. Based on my math (please refer to my September 17th post titled “MCD – Coffee Could be the Tipping Point!” for more details), even if MCD accelerates the conversion process in 2H08, the total number of McDonald’s stores with the ability to sell specialty coffee in the U.S. would be 2,800, which only accounts for 25% of MCD’s U.S. system. The fact that franchisees are now facing additional hurdles to obtain the necessary financing to upgrade its stores (at a time when cash flows are already under pressure from increasing commodity costs) will only further delay this conversion process. For reference, MCD will invest up to 40% of the remodel cost, which on average can range up to $75K, and the operator will be responsible for current equipment costs of approx $25K. That being said, based on the article and MCD’s comments at a recent Bank of America conference, management maintains the beverage rollout is still progressing as planned, but I remain unconvinced.
