McDonald’s Cooks Up a Turnaround Recipe

The fast-good giant plans to streamline management, refranchise more restaurants, and return as much as $9 billion to shareholders this year.
Katie Kuehner-HebertMay 4, 2015
McDonald’s Cooks Up a Turnaround Recipe

McDonald’s on Monday announced plans to restructure its business and refranchise more stores to offset sluggish sales volumes, as well as return more money to shareholders.

Beginning July 1, the Oak Brook, Ill.-based company will operate under a new organizational structure with the following market segments: the United States, led by Mike Andres; “international lead markets” — established markets including Australia, Canada, France, Germany and the United Kingdom, led by Doug Goare; “high-growth markets” — markets with relatively higher restaurant expansion and franchising potential, including China, Italy, Poland, Russia, South Korea, Spain, Switzerland and the Netherlands, led by Dave Hoffmann; and “foundational markets” — the remaining markets in the McDonald’s system, each of which has the potential to operate under a largely franchised model, led by Ian Borden. Corporate activities will also be reported within this segment.

“Our new structure will be supported by streamlined teams with fewer layers and less bureaucracy, and our markets will be better organized around their growth drivers, resource needs, and contributions to the company’s overall profitability,” McDonald’s president and chief executive Steve Easterbrook said in a press release.

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The company also announced plans to accelerate the pace of refranchising and increase the global franchised percentage from the current 81% to about 90%, with the goal to refranchise 3,500 restaurants by the end of 2018.

The company expects this move to result in roughly $300 million in net annual general and administrative savings, most of which will be realized by the end of 2017, in connection with the company’s organizational restructure, refranchising strategy, and “more stringent discipline around spending throughout the organization.”

“Our new, more heavily-franchised business model will generate more stable and predictable revenue and cash-flow streams and will require a less resource-intensive support structure,” McDonald’s chief administrative officer Pete Bensen said.

McDonald’s also plans to return $8 billion to $9 billion to shareholders in 2015 and to reach the top end of its three-year, $18 billion to $20 billion cash return to shareholders target by the end of 2016.

McDonald’s shares were down slightly on Monday.

Stephens analyst Will Slabaugh told Bloomberg that investors may have been looking for an update on how much debt the company is willing to take on as it returns cash to shareholders.

“That was something that was missing,” Slabaugh reportedly said. “They haven’t touched on that quite yet.”

On announcement of the news, Standard & Poor’s downgraded McDonald’s Corp. corporate credit rating to A-minus from A.

“While we see credit and cash-flow benefits from refranchising, lower capital spending, and cost reductions, these are largely offset by our current assumption that absent specifics on longer term financial policy, the company will return much of this cash to shareholders and credit measures will not return to the low-2x area,” the rating agency said.