MCD - The Stress is Emerging

In February, McDonald's gave away its McSkillet Burrito with the purchase of any medium or large drink for two days. In April, an internal memo urged franchisees to cut the price on its 32-ounce soft drinks to $1 in some markets, and on May 15, its newly launched Southern Style Chicken Sandwich/Biscuits were free with the purchase of any medium or large drink. And everyday, there is the Dollar Menu.

Today, Crain's reported that a panel of MCD's owners that sets national advertising for all 14,000 U.S. restaurants is resisting the company's plan to give away more chicken sandwiches in August as a result of rising food costs. The article highlights the issues that can emerge within the typical franchise business model when the franchisor (McDonald's) puts driving sales, on which it collects a royalty, ahead of franchisee (85% of MCD's U.S. system) profitability.

I have written extensively about the issues surrounding the Dollar Menu and how it is impacting franchisee's bottom lines and now these same problems are surfacing around the company's recent promotions. Ed Bailey, who owns 60 restaurants in Texas, said, There is no question the tension is greater now than it has been in some time. He estimates that the May 15 Southern Style Chicken giveaway cost franchisees about $600 per restaurant and that despite a 7% increase in sales last year, his profits were relatively flat due to higher costs.

The article also states that food and paper costs are expected to increase $32K-$35K per restaurant this year and the franchisees (again 85% of the system) are absorbing the brunt of these rising expenses. Another MCD owner with five locations in Oklahoma said that in voting against a second chicken promotion in August that franchisees aren't pushing back but rather making an intelligent business decision.

At the same time franchisees are facing pressure on the bottom line, they are being told to invest their own capital in the infrastructure necessary for the company's extended beverage as I have said once before regarding MCD's U.S. system, where there is smoke, there is fire!

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