Mounting Franchisee Problems for McD’s, NYC’s Fast Food Growth and More

McDonald’s franchisees face numerous problems. Foodservice operators kept hiring in May. New York City fast food employment grew 87 percent in the last 15 years. NPD Group says traffic was flat but menu price increases drove dollar sales. These stories and a whole lot more in This Week In Foodservice.

McDonald’s problems have been well publicized in the past couple of years but a recent Wall Street Journal article examined another aspect of the problems, namely the situation of the franchisees. As reported a month or so ago, including in this space, Janney Capital Market’s  survey of McDonald’s franchisees found the relationship between franchisor and franchisees to be at the lowest level it has been in the last 11 years. It’s important to note, however, that the survey is based on a small number of McDonald’s operators, some friction between franchisor and franchisee is the norm, and it is possible that dissatisfied franchisees may be more likely to respond to the survey.

Declining sales and operational problems are only part of the difficulties. Big Mac has been described as a real estate company that sells hamburgers as a side line. McDonald’s owns the land and buildings and rent payments have risen 26 percent in the past 5 years and now account for one fifth of the chain’s revenue. Yet, the franchisees pay for most of the remodeling and upgrading. According to the article a complete remodeling can cost upwards of $650,000. The customized burger program, “Create Your Taste”, costs $125,000 per restaurant. Five hundred units will install double lane drive-thrus this year.

Whether as a result of shrinking sales or increased expenses, some franchisees are carrying more debt than McDonald’s prefers and the corporation is reviewing some franchisees accounting statements monthly rather than annually.  In some cases, franchisees are being required to inject more equity into the business.

McDonald’s has been working with a group of preferred lenders to relax terms of the loans for franchisees’ major remodeling projects. Those McD operators installing the double drive-thrus will have a 10-year loan repayment plan as opposed to the typical 7-year loan. The company will also reduce rent for franchisees who pay the full cost of remodeling themselves.

While it appears McDonald’s is struggling to correct its problems the article states some franchisees saying, “If business doesn’t get better in 6 months, I have a problem.”

In related news, the chain’s May U.S. comparable store sales declined 2.2 percent. Worldwide same-store sales were better, dropping 0.3 percent with comps in Europe up 2.3 percent. UK comparable sales were “strong” while France and Germany comps were “slightly positive”; Russia was “slightly negative.” The Asia/Pacific, Middle East and Africa saw same-store sales fall 3.2 percent. Australia had a “strong performance” but was offset by sales declines in Japan and China. Other areas doing well were Canada and Latina America. Like other companies that sell overseas, McDonald’s was hammered by the strong U.S. dollar with total sales down 7.2 percent. When currency changes are adjusted, McDonald’s sales rose 1.8 percent.

Economic News This Week

  • ADP’s May National Employment Report said the private sector added 201,000 jobs. Small businesses – those with fewer than 50 employees accounted for 122,000.
  • Initial jobless claims fell to 276,000, a decline of 8,000 for the week ending May 30. The 4-week moving average hit 274,500, an increase of 2,750. This data continues to show layoffs remaining at historically low levels.
  • Employment improved significantly in May according to the Bureau of Labor Statistics. Private employment rose by 262,000 while government entities added another 18,000. It now appears the weak showing in the labor market in March was a one-month glitch. The report did have some negative factors. Levels of long-term unemployed remain high as does the number of workers employed part time who desire full time work. The unemployment rate ticked up to 5.5 percent in May from 5.4 percent in April. (To see foodservice employment fared in May, please see the article in This Week In Foodservice below.)
  • Hourly wages crept up this year with the Bureau of Labor Statistics May report showing an increase of 2.3 percent. Since the end of the recession, wages have been averaging about a 2 percent increase.
  • Personal spending was flat in April indicating consumers remain cautious and choose to save rather consume. Personal Income rose 0.4 percent in April after being flat in March.
  • April construction spending estimates came in at $1006 billion on a seasonally adjusted annual rate. This represents a 2.2 percent increase over March 2015 and a 4.8 percent increase over April 2014. Residential spending in April was estimated to rise 0.6 percent over March at a seasonally adjusted annual rate.
  • The Institute for Supply Management’s Production Manufacturing Index increased by 1.3 percentage points to 52.8 percent in May. Any number above 50 indicates expansion.
  • The Institute for Supply Management’s Non-Manufacturing Index retreated in May, falling 2.1 percentage points to 55.7 percent. But, the Index stayed well above 50, indicating increased activity by service industries for the 70th consecutive month. The New Orders Index fell by 1.3 percentage points to 57.9 percent.
  • New orders for manufactured goods fell 0.4 percent in April, according to the U.S. Census Bureau’s full report.
  • Productivity fell 3.1 percent at an annual rate in the first quarter of the year while unit labor costs rose a steep 6.7 percent. The data confirms other information about how poor the economy was in the first quarter.
  • The trade gap fell 19.2 percent in April, the largest decline in more than 6 years, despite a strong U.S. dollar. High imports and low exports have been a drag on the entire economy but strong domestic petroleum production has narrowed the numbers. UA export of services was the highest on record.
  • U.S. auto sales were strong in May with SUVs and light trucks doing well.  Even with some manufacturers flat or down, sales were 17.79 million at an annual seasonally adjusted rate, which is the highest since July 2005.
  • The U.N.’s Food & Agricultural Price Index fell to its lowest level since 2009. Ample supplies and generally favorable crop outlooks were responsible for the decline.

Foodservice News This Week

  • Foodservice employment posted a nice increase in May with the Bureau of Labor Statistics reporting foodservice operators added 17,000 new employees. This represents 6.5 percent of the total new jobs in the private sector for the month.
  • New York City’s fast food employment shot up 87 percent between 2000 and 2014. The statistic comes from the National Employment Law Project, which backs higher wages for fast food workers. New York’s Governor Cuomo announced last month he backs raising fast food workers’ wages because so many of them rely on state welfare support. He has bypassed the NY legislature and appointed a fast food wage board. Foodservice operators contend that a $15 an hour minimum wage would result in increased prices but backers of higher wages insist the effect on prices would be modest.
  • Foodservice increased 3 percent for the year ending April 2015 but The NPD Group says that the number of visits to restaurants was flat. The increase in sales is due to menu price increases according to NPD. (The press release did not address the possibility of restaurant customers trading up.) NPD says their research indicates the number of meals eaten at home has been rising at the expense of dining out. On the other side of the coin, the amount of food dollars has been about 50/50 between home dining and eating out. NPD says right now foodservice has a slight edge over in-home food spending.
  • Beef ‘O’ Brady’s will introduce a fast-casual concept named Beef’s Express in South Lakeland, Fla. The menu will be one-third the size of a standard Beef ‘O’ Brady’s location. Customers will place orders at the counter and servers will deliver food tables. The new concept will not be a sports bar and will have at most four TV sets.
  • Gusto, a concept of Toronto-based Gusto 54 Global Restaurant Group, will open its first U.S. location in Los Angeles.
  • Can Shake Shack grow to 450 units soon? Some observers, including Technomic, think it may be a stretch. While the “better burger” market remains hot, it features plenty of competition and Shake Shack’s $8.00 burger puts it at the high end of the market. And, people remember the Krispy Kreme debacle when fast expansion resulted in a massive retrenchment.
  • Corporate Stirrings: Kahala Brands, owner of Cold Stone Creamery, Blimpie and over a dozen other foodservice brands, announced it now controls 100 percent of the Planet Smoothie and Tasti D-Lite franchise brands.
  • Growth Chains: Freddy’s Frozen Custard and Steakburgers has stores under construction in 10 states as the company plans to open 45 locations this year. The Halal Guys announced a 5-unit franchise agreement for Northern Virginia. Boston Market plans on opening 10 locations this year and 20 more in 2016. Goodfella’s Pizza will open restaurants in Louisville, Columbus and Nashville. Black Bear Diner is on track to open 11 new units this year, which will give the chain a total of 79 locations. Grabagreen announced a three-unit development agreement for Dallas. Wendy’s plans on opening 1,000 units by the end of 2020, most of them franchised. Tom+Chee will open five restaurants in Central Florida. Jersey Mike’s will open four restaurants in Sacramento, Calif.
  • Comparable Store Sales Reports: Cracker Barrel up 5.2 percent, McDonald’s down 2.2 percent, and Zoe’s Kitchen up 7.7 percent.

For details and same-store sales of other chains, please click here for the Green Sheet. 

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