McDonald’s to sell franchises

McDonald’s Corporation plans to sell more restaurants to franchisees and restructure its international operations to cut $US300 million in annual costs.

Steve Easterbrook, in a much-anticipated presentation nine weeks into his tenure as CEO, emphasises the importance of improving McDonald’s food and service as part of his turnaround plan. But the specifics mainly concern changes to its structure.

“In the past five years, the world has moved faster outside the business than inside,” he says in a 23-minute video announcing the changes. “I will not shy away from the urgent need to reset this business.”

McDonald’s plans to sell 3500 of its approximately 36,000 restaurants world-wide to franchisees by 2018 – more than the 1500 it previously planned to sell by 2016. The goal is for 90% of McDonald’s restaurants to be franchised, up from about 81%, a change Mr Easterbrook says will provide more stable, predictable revenue.

He also says McDonald’s will reorganise its global business starting July 1 under four segments: the US; “international lead markets” such as Australia and the UK; “high-growth markets” such as China and Poland; and a grab bag of other countries called “foundational markets.” 

The structure is designed to group markets that have similar dynamics and challenges, rather than just geographical proximity.

The restructuring will involve layoffs, primarily overseas, though Mr Easterbrook didn’t give details. 

The more aggressive embrace of franchising follows a widening trend in the restaurant industry, with many big brands unloading locations to avoid the volatility of labor and commodity costs. Though that cuts corporate revenue, it leaves more stable cashflow from royalties, licensing and property leases, generally with a higher profit margin.

Mr Easterbrook didn’t go into as much detail as some analysts and investors had anticipated about further steps to improve food and service.

While outlining plans to return $US8-9 billion to shareholders this year, as part of a three-year plan through to 2016, he didn’t detail strategies to fund share repurchases, such as taking on more debt or spinning off real estate holdings.