McDonald's Has a McPlan

McDonald's came out with its third-quarter earnings yesterday, and the company did quite well in some troubling times. The company also said it would be trimming 10% of its home office staff in order to provide more support to its 13,000 U.S. restaurants. The goals are to improve efficiency, customer service, and profitability, the troika of quick-serve restaurant goals. (Well, not counting good food.)

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By Bill Mann (TMF Otter)
October 19, 2001

In the wake of a fourth straight quarter of declining earnings, quick-serve restaurant giant and FOOL 50 component McDonald's (NYSE: MCD) has announced some plans to get back to basics: keeping customers happy.

The plan is designed to improve the performance of McDonald's 13,000 U.S.-based restaurants by redirecting money and resources from its central operations to the restaurants in order to help them re-emphasize service, quality, and cleanliness. This includes a layoff of as much of 10% of the company's home office staff.

The new program involves dozens of time-saving measures, such as reducing paperwork requirements for franchise managers so they can concentrate on their customers' quality of service experience, as well as such seemingly inconsequential changes in food prep methodology as using pre-sliced tomatoes and adopting a single paper wrapper like that used by Tricon Global's (NYSE: YUM) Taco Bell chain. (We took a look at Taco Bell earlier this week.)

Such matters are of huge importance to quick-service restaurants, particularly when they are still growing, and adding scale further and further from HQ's watchful eyes. Even in a challenging 2001 environment, McDonald's managed to increase its restaurant count by nearly 7% over last year, more than 20% of those openings coming outside the U.S.

McDonald's, for example, spent millions of dollars designing its buns to optimize the speed at which they could be heated. But the franchise network has been under stress for some time now. Several franchisees, according to The Wall Street Journal, have expressed disappointment at the lack of details from McDonald's management thus far.

The program also places additional responsibility on the franchisees. McDonald's will send "mystery shoppers" to each of the restaurants at least once a month in order to gauge the customer satisfaction experience from fries to smiles. As an infrequent customer of McDonald's, I'm glad to hear this: An experience I had in an Akron, Ohio, McDonald's once led to the only instance when I was sorely tempted to say, "Look, people, I am an OWNER of your company, so treat me with some [radio edit] respect!"

I'm still a stockholder, and I'm looking for signs that McDonald's is pressing to increase its profitability in line with improving its service. Massive improvements in operating methodologies do me little good without a resultant increase in the bottom line, even if it does not come right away.

For the just-ended quarter, McDonald's reported earnings of $0.42 per share, including some one-time items, but guided lower -- to $0.34-$0.36 per share -- for the next quarter. Given that many of the countries McDonald's operates in are in the throes of a recession, this is hardly surprising, and now that the company gains more than 50% of its profits from overseas, continued weakness in local currencies -- particularly the Japanese yen -- do not help its dollar-denominated financial returns.

I like the tool McDonald's includes in its earnings release: a line item for "constant currency" to show what its returns would be absent of the influence of currency fluctuations. McDonald's keeps its international operations largely compartmentalized. All of its Indonesian operations, for example, from financing to raw goods purchase, are wherever possible denominated in rupiah. This is of enormous benefit to the local franchisees, but can have a depressing effect upon U.S. dollar-denominated corporate financial returns.

McDonald's is a company that has seen some extraordinary pressures over this past year, from the terror in Europe caused by Mad Cow disease to the global recession, to protesters who cannot seem to think of a better target in any cause than a local McDonald's outlet. Proper response to these threats will require some real creativity, something McDonald's has displayed in its drive to becoming the world's largest restaurant chain. We'll see what happens here.

Bill Mann thinks Taco Bell's "Think outside the Bun" campaign is the stupidest he has seen yet. "Downloading a quesadilla"? Give me a break. Bill owns shares of McDonald's. The Motley Fool is investors writing for investors.

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