By Julie Jargon
Franchisees' view of McDonald's Corp.'s U.S. business has
continued to decline and their relationship with the company hit a
new low in the past three months, according to a survey released
Thursday.
The survey's 29 respondents, who operate 208 McDonald's
restaurants, reported the worst six-month outlook for the U.S.
business in the 12 years that analyst Mark Kalinowski has been
conducting a quarterly poll of franchisees. The franchisees'
outlook is worse than the survey's previous low point, reported in
April. The respondents also rated their relationship with
McDonald's as being the lowest in the survey's history.
"Approximately 3,100 franchisees own and operate McDonald's
restaurants across the U.S. Less than 1% of them were surveyed for
this report," a McDonald's spokeswoman said. "We value the feedback
from our franchisees and have a solid working relationship with
them."
McDonald's has been trying to reverse more than two years of
sagging sales, with new Chief Executive Steve Easterbrook shuffling
the management ranks, trimming down what had become a bloated U.S.
menu, adding more midprice menu items and attempting to speed up
drive-through service. The franchisees surveyed said those moves
haven't yet born fruit.
The franchisees predict a 2.3% decline in June same-store sales
in the U.S., well below analysts' expectations of a 0.3% decline.
McDonald's plans to report June same-store sales and second quarter
earnings on July 23. After that, McDonald's will no longer report
monthly same-store sales.
While the survey covers a small share of McDonald's more-than
14,000 U.S. restaurants, it is widely followed for insight into the
vital relationship with franchisees, which McDonald's closely
guards.
Some McDonald's franchisees have complained that several years
of investments for store remodeling and new equipment have left
them saddled with debt and unable to expand or make further
investments to boost the business. As a way to cut labor costs--the
biggest expense for a restaurant operator--many franchisees are
introducing self-order kiosks or cutting restaurant hours.
Mr. Kalinowski's survey suggests that some franchisees'
financial situations are getting worse. One respondent noted a
number of operators are nearing the end of their 20-year franchise
agreement and may not be able to enter into new ones because they
fall below the financial thresholds required of them.
"Everyone is worried that there are no longer any operators that
can buy their stores," this franchisee stated. "I suspect there
will be a large number of fire sales with the end result that
everyone's equity will go down."
Another franchisee said, "For the first time ever I had to
provide a complete financial review by my lender when my loan will
be paid off in less than a year. It seems they are very concerned
about the financial condition of the operators."
Franchisees also said they have been hurt by the increases in
rent they have had to pay to McDonald's and that McDonald's plan to
raise the minimum wage at its company-owned restaurants could
further hurt them. That policy doesn't apply to franchisees but
some of them fear it will pressure them to follow suit.
"The operators sit on a cliff right now," noted one franchisee.
"With sales going in the wrong direction, all must be conservative
in our decisions."
Mr. Kalinowski previously carried out his survey at Janney
Capital Markets, but left the securities firm in June and did the
latest version independently.
Write to Julie Jargon at julie.jargon@wsj.com
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