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McDonald's franchisees say new Dollar Menu will do well

But operators in an Instinet survey say the menu and other changes won't help their profits.

McDonald’s franchisees say that the company’s newly introduced $1 $2 $3 Dollar Menu will generate sales in the short term, but they worry about the program’s long-term profitability.

That’s according to the latest quarterly survey from Instinet analyst Mark Kalinowski, who believes that the new value menu will generate another 150 basis points of same-store sales this year.

The analyst believes the burger giant will say same-store sales grew 4% in the last three months of 2017. McDonald’s is set to report its fourth quarter earnings next week. The company’s stock was up slightly on Tuesday.

The latest quarterly survey included responses from 26 operators who own 286 locations. That’s only a tiny fraction of McDonald’s 14,000 U.S. locations, suggesting a high margin of error.

But the responses do provide a window into the views of some of the chain’s franchisees, who are primarily responsible for putting the company’s plans into motion. Franchisees own all but about 900 of those U.S. locations.

And those operators are remodeling locations, installing kiosks, adding new coffee and espresso drinks, dealing with rapidly expanded delivery and curbside service, as well as training for the chain’s upcoming move to fresh beef Quarter Pounder burgers made to order.

The number of initiatives, plus the chain’s strong same-store sales last year, have generated considerable enthusiasm among investors, who have pushed the chain’s stock price to all-time highs, above $170 a share. Kalinowski himself has a “Buy” rating on the stock and believes it could go up to $190.

And many operators noted the chain’s success. “Lots of changes but we seem to have some momentum going,” one wrote.

Operators overwhelmingly gave their go-ahead for the $1 $2 $3 Dollar Menu, even amid traditional concern among franchisees that such discounts cost them profits.

mcdonalds new dollar menu

But one operator in the survey said that he “felt like I had no choice” but to approve the menu.

In general, operators seemed to suggest that the Dollar Menu would have a stronger benefit for the franchisor, which generates sales from a percentage of revenue, than franchisees that rely on profits.

“I do believe our sales will respond to recent changes but the increase won’t result in added cash flow,” one wrote. “If we don’t add cash flow then nothing else makes any difference.”

Another said that the company is demanding a lot of changes that won’t help their profits. “Corporate is forcing spending on new equipment, products, major remodel projects, interior refreshes, with little regard if any regard for cash flow,” a franchisee said.

Said another: “The $1 $2 $3 Dollar Menu does give customers choices, but it isn’t profit-oriented. It’s good for buying guest counts.”

Not everybody was complaining. One franchisee said the new Dollar Menu is “clean and easy,” but that his biggest frustration is that there is no biscuit sandwich in the lineup and that many customers want a program offering two products for a single price.

And another said that many of the changes will have a long-term benefit for the chain, especially in relation to its primary competitors.

“While it’s hard to keep up with all the changes, I think McDonald’s is making many of the right moves and we are about to make a quantum leap over our competitors,” the operator wrote. “The years 2018, 2019 and 2020 will be good years in McDonald’s.”

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