McDonald's offers aid and warns some downsizing needed

[CHICAGO] McDonald's is estimating that tens of millions of dollars will be needed to help US franchisees, but has also warned that some distressed franchisees may need to downsize or sell off locations.

The company has earmarked about US$40 million in aid for restaurant owners that are in crisis following the Covid-19 lockdown, according to documents and internal emails viewed by Bloomberg News. The fast-food chain has nearly 14,000 US locations, 95 per cent of which are franchised.

Temporary assistance will be available on a case-by-case basis, and franchisees are expected to work with the parent company to "find a suitable financial solution", according to documents and an internal email viewed by Bloomberg News. Aid will likely come in the form of rent and service fee deferrals for operators that have a large portion of restaurants in malls, airports and other areas hardest hit by the coronavirus pandemic.

Nevertheless, franchisees that want aid beyond the existing measures were advised by McDonald's US president Joe Erlinger on a call last week that they may have to consider selling locations or seeking other alternatives, according to a person familiar with the matter. This stance has angered a group of owners, the person said.

"Each restaurant must financially stand on its own, irrespective of any relief program or vendor concessions related to the Covid-19 crisis," according to the assistance plan.

The total number of McDonald's restaurants has inched downwards in recent years. Revenue per location has risen, however.

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Even so, many franchisees are under pressure amid the pandemic lockdown, and this is especially acute in regions that depend on tourism, according to the internal McDonald's email. These operators are encouraged to seek aid from the parent, the messages show.

'TARGETED ACTIONS'

McDonald's, which has thousands of franchisees that vary widely in size and number of locations operated, said earlier this month that it's investing to help franchisees recover with "targeted and temporary actions" including about US$100 million in additional funds for marketing.

Chief executive officer Chris Kempczinski said "the path is uncertain and will present further challenges", in reference to reopening stores and dining rooms that have shuttered. The ad spending is meant to help fuel a sales recovery in coming months, he said.

"For many years we've had a process in place to work with franchisees who are having financial hardship, and there's a number of options that we would explore with them to help them address their financial situation," said spokesperson David Tovar. "We're pleased to be able to provide additional financial support to our franchisees to continue to weather the storm."

Franchisees have pressured the parent company to increase assistance and broaden its availability for operators as the scope of Covid-19's impact on the economy becomes apparent. McDonald's March comparable sales, a key gauge of restaurant performance, dropped 13 per cent in the US, and more than 22 per cent globally.

McDonald's shares rose 2.3 per cent to US$183.62 at 2.43pm in New York trading. The stock has declined about 7 per cent in 2020, compared with the 8 per cent decline for the S&P 500 Index.

The lockdown measures and sudden change of consumer behaviour has deeply disrupted the restaurant industry by forcing dining-room closures and keeping consumers at home for long periods. One in four US restaurants may go out of business in the aftermath, according to a forecast by OpenTable.

While sales are beginning to rebound, especially for companies with drive-thrus and strong takeout operations, restaurant owners are loathe to open dining rooms too soon and risk being tied to a new outbreak of illness - even though a widening group of US states is giving the green light. McDonald's dining rooms are no exception, with many restaurant operators taking time to hire staff and conduct training before opening up seating.

ASSET LIGHT

Other fast-food chains, including Jack in the Box, Dunkin' Brands Group, Restaurant Brands International and Wendy's have also pledged aid to struggling restaurant operators. These companies, along with McDonald's, have largely adopted an asset-light business model, which keeps the intellectual property with the parent while pushing much of the operational risk to franchisees.

Even so, companies are increasingly on the hook for assistance and concessions on rent, royalty and marketing payments as financial distress rises amid the pandemic.

BLOOMBERG