A lot is being said in the business press about “fixing McDonalds”. I’m not sure that McDonalds is broken, but there are certainly lot’s of room for improvement. McDonalds share price has certainly stalled, its basically at the same level since 2011, although its still near all time highs.
Menu Items
There are too many menu items at McDonalds. This makes it harder for team members to prepare items; so consistency and quality suffer as a result. While focusing on rationalizing the menu, McDonalds should consider the items that add complexity to the system, which items have the best margins, and canalization. McCafe items have a high margin and are relatively easy to prepare, but a special sandwich with its own bun might be cannibalizing other menu items while also adding complexity to the system. Making it harder for team members to deliver consistently.
Better Food
Just as Coca-Cola shouldn’t change the formula for Coke Classic, McDonalds should never change the way a Big Mac tastes. But there are things that McDonalds can improve about some of its iconic menu items without changing the way they taste and feel. What about the beef? McDonalds could improve the quality of its beef without sacrificing taste by eliminating such things as beef raised with hormones.
Invest in People
McDonalds faces pressure from labour unions to increase the pay of its front line team members. McDonalds should confront this challenge head on by investing more in its own people. McDonalds should focus more resources on recruiting, training, and retaining its front line team members. McDonalds should take a holistic approach to its human capital by providing team members with a more valuable working experience. This could mean more sponsorship and support for team members who are making charitable impacts in their community. McDonalds should provide more resources to team members that will help them with personal development. Better trained, more motivated team members will ultimately deliver a better experience to guests.
Real Estate Investment Trust
It’s estimated that McDonalds could unlock at least $20 billion from spinning off its real estate holdings. McDonalds owns 45 percents of the land and 70 percent of the buildings its restaurants sit on. These properties would make a great foundation for the creation of a public REIT. This strategy seems like a no-brainer. REIT shares could be given to shareholders in a tax free way, and the REIT could grow by acquiring other retail REITs or individual properties as a way to diversify its portfolio and single tenant risk. The REIT could also be structured so that McDonalds continued to control the REIT either by a voting structure of by McDonalds remaining as the largest shareholder. Spinning off a REIT doesn’t mean the sponsor has to loose control.
Re-Franchising
McDonalds could kick start earnings by re-franchising corporate owned stores. About 10 percent of McDonalds stores are corporately owned and 90 percent are franchised. A re-franchising strategy will bring fresh capital and energy into the McDonalds system. Although I loathe Burger King, re-franchising worked well for them.
Store Formats
At an earlier stage of its evolution, McDonalds thrived on standardization. Each McDonalds had the exact same format, each store looked the same. But as the number of stores grew, and McDonalds expanded into all geographic areas, its stores became more customized. A McDonalds in Manhattan has a different real estate footprint compared to a McDonalds in Buffalo. What about more McCafe’s with limited menus? Just as every McDonalds doesn’t need a PlayPlace, McDonalds should explore satellite store formats as well as large scale destination formats such as a giant McDonalds on the Las Vegas strip, or a McDonalds resort with a McDonalds museum experience? If you think a McDonalds resort sounds crazy, check out the Bass Pro Shops Memphis Pyramid or Big Cedar Lodge.
