The operator complaints regarding McDonald's costly store remodels were an inevitable part of the revamp process. How CEO Steve Easterbrook handles the complaints, though, is going to be the difference between whether this giant project works or not.
— Erika Adams
McDonald’s had a lot to answer for going into its latest earnings report, Wednesday. In the past quarter, McDonald’s franchisees have continued to voice their discontent with the number of costly upgrades and ‘Experience of the Future’ (EOTF) store remodeling requirements that have come down the pipeline, forcing McDonald’s to loosen the timeline on the remodels.
A number of concerned franchisees have banded together to build a separate franchisee association, the National Owners Association (NOA), that is working to provide a public, independent voice for McDonald’s operators. The NOA has recently been pushing out surveys publicizing how frustrated operators are with various McDonald’s initiatives, from kitchen buildouts to the chain’s delivery partnership with Uber Eats.
On McDonald’s fourth-quarter earnings call, CEO Steven Easterbrook acknowledged that, yes, corporate’s relationship with franchisees could be better right now, but the complaints are nothing out of the ordinary for a company that is in the middle of necessary, sweeping operational changes.
“Wouldn’t life be great if everyone was happy? Of course,” said Easterbrook. “Am I fundamentally concerned that it will derail us from the shared vision that we have? No, not at all.”
‘Experience of the Future’ Update
Despite pushback, the EOTF remodeling plan is moving along at a very quick pace. In 2018, about 4,500 U.S. restaurants were converted to EOTF models, according to the company, boiling down to more than 10 new restaurant openings every day last year.
Easterbrook acknowledged that this was an “aggressive pace with an ambitious agenda” at a time when restaurants across the industry are struggling to maintain profitability while operational costs are rising in every corner of the restaurant, from labor to rent to food costs. He noted that McDonald’s U.S. leadership team had met with franchisees in all 10 of McDonald’s field offices across the country at the end of last year to hear concerns and discuss the challenges that everyone was facing.
However, McDonald’s is still firmly invested in the future of the EOTF vision. The company expects to spend $2.3 billion of capital in 2019, with $1 billion earmarked specifically for completing about 2,000 EOTF projects in the U.S.
While McDonald’s did extend the deadline for franchisees to update their stores to EOTF models, the company confirmed that most franchisees are opting to go ahead with the remodel sooner rather than later, leading all upgrades to be “substantially completed” by the end of 2020.
“Once you start to look at the impact of the EOTF, as you start to look at the ample digital menu board, then you start to introduce delivery, alongside the self-order kiosks, the in-house hospitality,” Easterbrook said. “That combined suite of initiatives really is generating much stronger lifts.”
McDonald’s fourth-quarter comparable sales were up by 2.3 percent in the U.S. (coming in below analyst estimations). The company credited the sales increase to growth in average check sizes due to menu price increases and strategic shifts in the product mix. Menu prices went up around 2 percent last quarter, as McDonald’s balanced rising operational costs with how much of a price increase customers would be willing to pay.
Internationally, fourth-quarter comparable sales were up 5.2 percent, primarily driven by sales growth in the U.K., Germany, and Australia.
System-wide, overall revenue was down 3 percent in the fourth quarter, and down 8 percent for the full year.
McDonald’s shares were trading slightly down (0.68 percent) immediately after the earnings call.