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McDonald’s executives defend their remodel plan

CEO Steve Easterbrook is not concerned that operator unrest will derail what he calls an ambitious plan in the U.S.
Photograph courtesy of McDonald's Corp.

Facing a sudden uprising among its U.S. operators, McDonald’s executives defended the company’s ambitious and costly remodel program, arguing that the addition of kiosks and digital menu boards have improved sales and customer satisfaction.

In their first earnings call since the formation of the independent National Owners Association last month, McDonald’s executives said they were not concerned that the unrest would derail from the company’s strategy.

“Am I fundamentally concerned that it will derail us from the shared ambition we have? Not at all,” CEO Steve Easterbrook said on the company’s fourth quarter earnings call Wednesday.

Executives said they expect most of the remodel project to be complete by the end of 2020. CFO Kevin Ozan said on the earnings call that 7,500 of the chain’s nearly 14,000 U.S. locations were remodeled by the end of 2018.

The company expects another 2,000 remodels to be done in each of the next two years.

Another 1,000 remodels will be done in 2021 and 2022, as some franchisees plan to take advantage of the company’s offer to extend the deadline for the remodels in exchange for a reduced company commitment. McDonald’s is paying 55% of the cost of remodels done by 2020 and 40% thereafter.

Ozan said another 1,000 restaurants will be rebuilt or relocated over that period, meaning 13,500 of the chain’s nearly 14,000 restaurants will be redesigned.

The project has come under fire in recent months as operators late last year formed the National Owners Association, the first independent association in the Chicago-based company’s long and storied history.

Operators have pushed back against certain elements of the remodel, notably a wall between the kitchen and dining area. They also argue that their cash flow has been hurt amid weak traffic and debt they have to take out to pay for the projects—many of which are being done not long after previous remodels.

About 70% of operators say they are “very unsatisfied” with their cash flow, and the association argues that 40% of them wouldn’t qualify for lease renewals based on the company’s own financial requirements—a number the company disputes.

Easterbrook suggested on the earnings call that disagreements between leadership and operators happen. “Sometimes they are low level, sometimes they bubble up to the service,” he said.

And he acknowledged the number of initiatives the company is undertaking this year. Company insiders have said they expected some pushback given the sheer number of initiatives undertaken recently—including all-day breakfast, new beverages, new value, marketing changes, fresh beef made to order and the remodels.

“Let’s keep in context how ambitious this plan is,” he said. “It was always going to be hard work. 2018 was a year of hard work. This was the year the company and operators began to write more significant checks as they committed to the plan.”

But executives also expressed confidence in the plan and particularly the remodeled locations, which they say are improving customer satisfaction and generating higher sales. They said that remodels in the U.S. thus far have performed as expected.

As customers grow more comfortable with the kiosks, they’ve been more likely to use them. In some international markets where the kiosks have been in place for a while, as many as 90% of inside customers use them.

“The combined suite of initiatives generate a much stronger lift,” Easterbrook said. He noted that, with 7,500 remodels complete in the U.S., the company is generating data to share with operators and “continue to build their confidence” in the strategy.

“We’ve seen it be really successful around the world,” Ozan said, noting the customer satisfaction scores at the restaurants with kiosks and the sales increases. “We’re seeing the same dynamic in the U.S. in the restaurants we’ve converted.”

That said, company executives said the remodels have led to longer downtime and have taken longer to rebuild customers on reopening, something executives said they are working to address. McDonald’s controls the construction process.

Company executives have also been in active discussions with operators as they’ve sought to ease their concerns.

The company gave operators the extension, for instance. It is also giving local markets more say in marketing and in value offers.

In addition, company executives have been meeting with operators in different markets. Easterbrook said that Chris Kempczinski, president of McDonald’s USA, has made visits to 10 field offices.

Easterbrook himself visited with operators earlier this month—he said he visited with several in Louisiana and Georgia.

Company executives argue that the speed of the remodel project is proving difficult for their competitors to match—none of the chain’s nearest competitors can come close to matching the speed with which McDonald’s is moving on this overhaul.

“We believe our ability to invest in the restaurants at a relatively quick pace helps us separate ourselves from the rest of the industry,” Ozan said. “That’s why we’re continuing to do that.”

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