Analyst: McD Franchisees Concerned Over Chain's Pricing Plans

A new survey of McDonald's franchisees shows same-store sales expectations for December and January remain strong, but concern over unit-level profitability is becoming apparent under the franchisor's pricing plans in an inflationary environment.

Janney Capital Markets securities analyst Mark Kalinowski surveyed 30 McDonald's owner-operators, representing 212 U.S.-based units, who together reported that they expect a 9.1-percent collective increase in December same-store sales, and expect January results to be strong as well.

"All in all we continue to believe that McDonald's is generating some of the very best U.S. same-store sales trends out of the top seven burger brands in the country," Kalinowski wrote.

McDonald's will release its fourth-quarter earnings before the market opens on Jan. 24. The Oak Brook, Ill.-based company's vice president of global external communications, Heidi Barker Sa Shekhem, said McDonald's would not comment on the analyst report.

The survey covers a small percentage of McDonald's domestic franchise system, which has more than 2,500 owner-operators and more than 14,000 total restaurants in the United States and 33,000 restaurants worldwide.

Kalinowski, however, has said the correlation of his franchisee surveys with actual chain results is high. In 49 previous publications of the McDonald's Franchisee Survey, the actual same-store sales result for McDonald's domestic system was within 1 percentage point of the survey's projection 36 times, Kalinowski noted. The actual figure has been within 2 percentage points of the survey estimate 44 times. The average magnitude of the difference between the survey and the reported same-store sales figure is about 1 percent.

Pricing concerns loom

Despite the optimism for sales, franchisees responding to Janney's survey expressed growing discontent with McDonald's pricing strategies in response to high commodity inflation, which is straining the franchisor-franchisee relationship for some respondents.

Janney's survey asked: "Will McDonald's operators be able to adjust menu prices to cover future commodity increases and still keep the Dollar Menu in place?" Respondents overwhelmingly answered no, with 23 of the 30 respondents, and just four franchisees responding yes. Three respondents either didn't answer or said they did not know.

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While some comments, all of which were kept anonymous, were openly hostile to the Dollar Menu — one respondent called it a "dinosaur" — many more expressed concern that increasing prices across the board would encourage, as one franchisee put it, "a deflection toward the Dollar Menu."

"Price resistance is kicking in," another owner-operator said. "Because we have the Dollar Menu, customers are not sympathetic when we raise menu prices. They know food in the grocery store is higher, but still shop for price, and that leads them to the Dollar Menu."

Ending 2011 strong

Kalinowski found that the West, East and Central regions reported projected same-store sales increases of 10 percent, 9.2 percent and 7.5 percent, respectively, for December 2011.

In anonymous comments explaining the month's performance, the majority of franchisees said very mild weather drove much of the sales improvement. A few others credited a calendar shift that yielded more shopping days during the Christmas season.

The franchisees also gave a collective best-guess projection for a 7-percent increase in January same-store sales. Owner-operators of the 43 restaurants in the Central region and 75 locations in the West estimated that January same-store sales would increase 7.2 percent, while franchisees of 94 units in the East predicted same-store sales growth of 6.8 percent.

Several respondents said sales in the first week of January were stronger than expected. Some cited the McBites limited-time offer, a popcorn chicken product, as driving consumer interest.

A fair outlook

The franchisees' nuanced feelings about the franchisor's pricing strategies led them to project a mixed outlook for the near future, according to Janney's report.

The respondents' average outlook for the next six months of business was 3.2 on a 5-point scale, in which 3 means "good" and 4 means "very good." That figure is modestly above the 3.0 average over the span of the McDonald's Franchisee Survey series, which has been conducted over the past 50 quarters, Kalinowski noted. Three months ago, that figure in the third-quarter survey was 3.1.

Contact Mark Brandau at mark.brandau@penton.com.
Follow him on Twitter: @Mark_from_NRN