MCD: Still Lacking Direction

We hope there are better days ahead for MCD, but on the surface it looks like the company is still struggling to find its way.  We continue to believe MCD is a short.


Yesterday’s announcement about higher wages was largely a public relations stunt.  Unlike the other large retailers that have announced similar wage rate actions, the majority of McDonald’s workforce is not eligible for this wage increase – unless the franchisees decided to follow suit (highly unlikely).  To be clear, PR stunts and marketing gimmicks will not fix McDonald’s.  It’s time for the company to get serious about making changes that will improve the operations of the company.

 

Traditionally, increased inflation (higher menu prices) benefits MCD’s bottom line which means that, on the surface, this announcement could potentially benefit the new CEO.  If the franchisees are forced to raise wages, they’ll certainly raise menu prices, which will benefit MCD’s royalty stream.  Good news for MCD right?  Not so fast. 

 

This news, along with other recent announcements, solidifies our short case for three reasons:

 

1.  It appears the subject of raising wages was not on the agenda at the recent franchisee convention.  If this is, in fact, true it raises the question: why was the new CEO unwilling to openly talk about this with franchisees?  This goes against the founding principles of the company.  The McDonald’s system was built on Ray Kroc’s vision of franchisees working not for McDonald’s, but for themselves in conjunction with McDonald’s.  He constantly promoted the slogan: “In business for yourself, but not by yourself.”  This philosophy was based on the simple principle of the 3-legged stool:

  • Franchisees
  • Suppliers
  • Employees

Given that the stool is only as strong as the three legs that formed its foundation, if one leg is broken the whole system will fail.  Franchisees must be profitable and successful – the future of the company depends on  it.

 

2.  MCD is in no position to raise prices given the market place’s current brand perception.  MCD already has a price-value perception issue and this will only be exacerbated by higher prices.  The closer McDonald’s average check gets to the “better burger” category (without an improvement in quality), the more market share it will cede.

 

3.  The new CEO hasn’t proven that he is willing to make drastic changes.  While we’re in the early days of Steve Easterbrook’s tenure as CEO, it appears that he hasn’t yet taken charge of the company.  The continued test of Create-Your-Taste and the recent announcement that the company will be testing all-day breakfast in Southern California are clear signs that this company isn’t serious about turning around.


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