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McDonald : Struggling McDonald's Plans to Trim Management McDonald's Plans More Layoffs -- WSJ

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06/08/2018 | 08:48am CEST

By Julie Jargon

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (June 8, 2018).

McDonald's Corp., battered by price wars and struggling to revive its U.S. burger business, said it will cut layers of managers as part of a half-billion-dollar plan to shrink administrative expenses by the end of next year.

The latest reorganization comes as the fast-food chain has been working to turn around its crucial U.S. division for more than three years.

The fast-food market has become increasingly competitive as rivals have come out with aggressive deals to attract customers. McDonald's has been losing market share to other chains and has lost the loyalty of some of its most cost-conscious guests, according to analysts.

In an email message to all U.S. employees, suppliers and franchisees this week, McDonald's USA President Chris Kempczinski said the company is restructuring regional offices around the country. "I recognize that change is difficult, and that eliminating layers within our organization means some employees will ultimately exit our system," he said in the memo, which was reviewed by The Wall Street Journal.

In a video message that accompanied the memo, he said the layers between field consultants and Chief Executive Steve Easterbrook will be reduced to six from eight, according to a franchisee who watched the video.

Mr. Kempczinski didn't mention the scope of the head-count reduction but is expected to provide additional details during a town-hall meeting Tuesday. A McDonald's spokeswoman on Thursday also declined to say how many jobs could be affected but added that the new structure in the U.S. would better support franchisees and help the company be "more dynamic, nimble and competitive."

The company has already cut an undisclosed number of corporate jobs in the last two years and said it is reinvesting some of its cost savings in technology, such as digital ordering, that it believes will lead to growth. Mr. Kempczinski explained in the written memo that the latest changes will enable McDonald's to become a nimbler organization that can make decisions more quickly.

But the company has struggled to get basic decisions right, including its menu. After a number of regional deals confused consumers, Mr. Kempczinski has said, the chain came out with one national value menu with items priced at $1, $2 and $3 each earlier this year, following the success of rivals' value offerings.

Competitors were focused on offering aggressive price promotions like Burger King's deal of 10 chicken nuggets for $1.69 and Wendy's four for $4 menu.

Burger King's parent company, Restaurant Brands International Inc., is owned by Brazilian private-equity fund 3G Capital Partners LP, which has cut costs at the burger chain and improved profitability. Burger King's emphasis on inexpensive meals helped it post a 4.2% increase in U.S. same-store sales in the first quarter, well outpacing McDonald's 2.9% growth, which was driven by higher-price menu items and price increases.The company said customer visits in the U.S. fell in the quarter due to greater competition from rivals at breakfast.

"If sales were strong they wouldn't need to be doing this now," said Howard Penney, managing director at Hedgeye Risk Management LLC, of the decision to undergo another corporate restructuring.

Investors cheered the move, however, sending shares up 4.4% to close at $169.48 on Thursday.

Independent equity analyst Mark Kalinowski on Thursday said his research suggests McDonald's U.S. traffic has turned positive since the company reported earnings in April.

Several franchisees interviewed by The Wall Street Journal applauded the move, saying too much bureaucracy has impeded decision making. More than 90% of McDonald's U.S. restaurants are operated by franchisees who pay McDonald's a percentage of their sales for the right to use the brand.

"I'm not sure what all of those management layers even do," said one franchisee. "The mood in the field is very positive because it will put a focus on things we hoped would be a focus for a long time."

The franchisee said that beyond just reducing management layers, the restructuring will enable the chain's field consultants to spend more time helping operators figure out ways to boost restaurant profitability rather than just grading restaurants on such things as cleanliness, customer service and order accuracy.

McDonald's had spent about a decade chasing health-minded consumers who favored fast-casual chains by adding salads, snack wraps and oatmeal to its menu.

After a major study in 2016 revealed that McDonald's had lost about 500 million orders in the U.S. to rival fast-food chains in the previous five years, it decided to go back to basics and figure out how to make a better burger. McDonald's assembled a panel of sensory experts consisting of suppliers, chefs and employees to compare rivals' burgers against theirs. They discovered that McDonald's burgers just weren't hot and fresh enough.

"We don't need to be a different McDonald's, but a better McDonald's," Lucy Brady, McDonald's senior vice president of corporate strategy and business development, told investors last year.

The chain in 2016 began a two-year quest to reconfigure its supply chain and distribution system to handle fresh -- rather than frozen -- hamburger patties, which rolled out nationwide last month in its quarter-pound burgers.

McDonald's also altered its grilling methods, began toasting its buns longer and changed its preparation procedures so that burgers would be cooked upon request rather than held in warming cabinets.

The company has pursued a number of other initiatives to improve the U.S. business and make its restaurants more relevant, including remodeling stores to look more modern, adding self-order kiosks and adding table service.

McDonald's has had some big wins, including the rollout of all-day breakfast, which helped fuel a sales recovery for a while. Low-cost food and beverages also have helped boost sales.

Write to Julie Jargon at [email protected]

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Financials ($)
Sales 2018 21 206 M
EBIT 2018 9 161 M
Net income 2018 6 024 M
Debt 2018 28 814 M
Yield 2018 2,56%
P/E ratio 2018 21,04
P/E ratio 2019 19,44
EV / Sales 2018 7,38x
EV / Sales 2019 7,49x
Capitalization 128 B
Chart MCDONALD'S CORPORATION
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McDonald's Corporation Technical Analysis Chart | MCD | US5801351017 | 4-Traders
Technical analysis trends MCDONALD'S CORPORATION
Short TermMid-TermLong Term
TrendsNeutralNeutralNeutral
Income Statement Evolution
Consensus
Sell
Buy
Mean consensus OUTPERFORM
Number of Analysts 31
Average target price 187 $
Spread / Average Target 16%
EPS Revisions
Managers
NameTitle
Stephen J. Easterbrook President, Chief Executive Officer & Director
Enrique Hernandez Non-Executive Chairman
James R. Sappington Executive VP-Operations & Technology Systems
Kevin M. Ozan Chief Financial Officer & Executive Vice President
Robert A. Eckert Independent Director
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