McDonald’s restructures & shifts more towards franchises

It is interesting to see the great McDonald’s struggle with a shift in customer sentiment globally – especially from South Africa where it has never been able to convincingly take on fast-food industry stalwarts such as KFC. This story about a reorganisation under new CEO Steve Easterbrook also signals a greater move towards franchising and has been prompted by an exodus of customers looking for higher-quality or cheaper fast food. Is the era of the Big Mac coming to an end, one has to wonder. It is certainly makes for a fascinating leadership challenge for Easterbrook. – Gill Moodie

From Craig Giammona, Bloomberg

mcdonald's bonds
Photo credit: mynameisharsha / Foter / CC BY-SA

McDonald’s chief executive officer, Steve Easterbrook, is restructuring the restaurant chain into four segments, saying the key to snapping its sales slump is improving operations.

The company also will shift more restaurants to independent owners, cut costs and return cash to shareholders, Easterbrook said on Monday.

McDonald’s is trying to stem an exodus of customers who are seeking higher-quality food at chains like Chipotle or cheaper fare at traditional rivals such as Burger King and Wendy’s. Easterbrook, a company veteran, took over McDonald’s in March after the company’s worst sales slump in more than a decade forced his predecessor from the job.

“Our turnaround will be grounded in operations excellence and running great restaurants,” Easterbrook said in a video presentation.

Investors, though, weren’t sold that the plans presented Monday will be enough to revive the company’s prospects. McDonald’s shares fell 1.6%  to $96.25 at 8:49 a.m. in early trading in New York.

Investors may have been looking for an update on how much debt the company is willing to take on as it returns cash to shareholders, said Will Slabaugh, an analyst at Stephens Inc.

“That was something that was missing,” he said. “They haven’t touched on that quite yet.”#

McDonald’s said today it plans to return as much as $9-billion in cash to shareholders this year through dividends and stock buybacks. The company also plans to reach the top end of its three-year target of returning as much as $20-billion by the end of next year.

Despite the lack of detail on debt, Slabaugh said that the company still appears to be “headed in the right direction.”

Mike Andres will continue to lead the company’s U.S. segment. Doug Goare, currently in charge of McDonald’s Europe, will be president of the new International Lead Markets, which comprises Australia, Canada, France, the U.K. and Germany.

Dave Hoffmann, president of McDonald’s Asia-Pacific, Middle East and Africa unit, which it calls APMEA, will lead the High- Growth Markets group. That segment includes China, Italy, Poland and Russia, among others. Ian Borden, currently chief financial officer of the APMEA unit, will be president of the Foundational Markets group, which includes about 100 countries.

In another move that may help McDonald’s bottom line, Easterbrook said McDonald’s will shift more of its restaurants to independent owners. The company plans to have 90 percent of its locations franchised globally by 2018, up from 81 percent today. Franchised locations are typically more profitable because the company bears less of the cost of operations.

The reorganisation also will entail cutting $300 million in annual general and administrative costs by the end of 2017.

“Having clusters of similar markets led by one person will create urgency and speed,” Easterbrook said. “It will spread insight faster, it will enable quick decision making, it will eliminate mistakes, reduce costs and unlock growth.”

Watch this January 2015 interview with Sara Senatore, an analyst at Sanford Bernstein, on Bloomberg TV discussing the challenges facing Easterbrook as he prepared to succeed Don Thompson as McDonald’s CEO. She speaks on “Bloomberg Surveillance”: