Sunday 26 March 2017

What's new underneath famous Golden Arches?

'Like all great inventions, McDonald's has reached the point where it needs to be significantly reset' Photo: PA
'Like all great inventions, McDonald's has reached the point where it needs to be significantly reset' Photo: PA

John Lynch

Ray Kroc, the genius behind the McDonald's fast-food chain and the man who proclaimed that he'd "put the hamburger on the assembly line", never took things for granted. Even in the midst of his retirement, he had a habit of instructing his chauffeur to drive around the McDonald's hamburger restaurants of southern California so that he could conduct surprise inspections of the premises.

The 'you-can-never-be-careful-enough' philosophy is amply borne out by periodic scandals that erupt around the most recognised brand in the world. Last year, the company's operations in the growing Chinese market were rocked by a videoed film of contaminated meat being processed for the fast-food giant by one if its suppliers. It's the inevitable price the group has to pay for its extraordinary worldwide growth over the past 80 years. In that time, McDonald's has built up to 8,000 company-owned outlets and 29,000 franchisees. It has 70 million customers every day in 120 different countries.

But like all great inventions, McDonald's has reached the point where it needs to be significantly reset. It has just appointed a new CEO, Steve Easterbrook, who makes no mystery about the need for change.

He recently outlined a restructured business that will combine markets with similar opportunities for growth, scrapping its old geographical operations.

The US market remains its largest segment with 40pc of group revenues. Established markets with similar growth potential, Canada, Australia, France, UK, Germany and of course, Ireland, are now bundled together as international lead markets. Its third area is now known as the high-growth markets. These are ones with high outlet expansion and franchisee potential and include China, Italy, Poland, Korea and Switzerland. The remaining markets, known as foundation markets, will be franchised. Such a structure will see franchisees increasing from 80pc to 95pc of all outlets.

Real estate ownership has always been an important component of McDonald's but the new CEO has decided against setting up a real estate investment trust. This was in response to a proposal from some investors to unlock value from its considerable property portfolio. To mollify these shareholders, the company intends raising the dividend by 5pc, increasing its share buyback programme by $10bn, reducing overheads by $500m and cutting capital expenditure.

It has been decided to shake up the company's offerings. Its breakfast menu will now be available all day, its bun will be toasted longer and it has promised to restrict the use of antibiotics in its food.

McDonald's is also facing a battle with the US labour authorities over the status of franchisees' workers. For decades, the understanding has been that fast-food companies don't employ the staff of its franchisees. This has now ended up with a court challenge about the precise status of these workers and the outcome could have far-reaching problems for McDonald's.

But the big task for the new management is the perception that its food is unhealthy. An added problem for the Big Mac maker is the EU suspects it may have exploited a deal with Luxembourg to avoid tax. The company now joins a growing list of US companies facing a fiscal clampdown.

Nevertheless, some good things are emerging in the important US market. After two years of decline, the group returned to growth with third-quarter sales in 2015. Sales increased as the company closed more stores than it opened in the US for the first time in its history. Overseas markets rose 6pc, driven by UK, Canada and Australia. Chinese sales increased 36pc but are not back to its pre-scandal levels. Long-term investors should be pleased with the price rising from $35 a decade ago to its all-time high of $114 earlier this year. Short-term investors have also seen the shares up 14pc in the last six months. Perhaps because of the record high, now may not be the time to buy McDonald's shares.

Nothing in this section should be taken as a recommendation, either explicit or implicit, to buy any of the shares mentioned.

Irish Independent

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