McDonald's Franchisees Gripe Over Aggressive Discounting

Analyst Survey Finds Some Owner Operators Balk At Suggested McWrap Pricing

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Not all McDonald's franchisees are lovin' the heavy discounting the company has been urging on them.

McDonald's McWrap
McDonald's McWrap

That's according to a franchisee survey released this week by Janney analyst Mark Kalinowski just ahead of McDonald's first-quarter earnings announcement on April 19. The survey focused on questions about discounting, and, among other topics, March and April sales projections. Mr. Kalinowski surveyed 25 franchisees who own 180 restaurants total. That's a fraction of McDonald's 14,000-plus U.S. locations, prompting Mr. Kalinowski to add the caveat: "Please keep in mind that these comments…may or may not be representative of the U.S. franchise base in general."

The survey results are interesting given that the coming earnings report is expected to focus on the chain's value menu. The company has been heavily promoting dollar-menu items in the early part of this year and late last year rejiggered its marketing calendar to make room for value promotions, particularly for its dollar menu. Franchisees are stressed about the aggressive dollar menu and value promotion in recent months, the Janney survey found, because it eats away at profits. "Although the quick-service restaurant business has been competitive for years -- decades -- perhaps there is more discounting going on today by McDonald's than usual," said Mr. Kalinowski in his note discussing the survey.

The issue is that the value promotion, especially in conjunction with the launch of the McWrap, rolled out April 1 , is wearing on franchisees. It's not unusual to offer new products at a discounted price in the fast-food business, but the McWrap is marketed as a premium product with a relatively high price tag of $3.99, not to mention it's the largest product launch of the year.

But franchisees in the survey said that McDonald's corporate wants them to heavily discount a product that should be sold at this premium price point. One franchisee commented in the survey that the Operators National Advertising Fund, McDonald's national marketing franchise council, rejected a proposal by corporate to offer the McWrap for a dollar.

(Separate from the survey, a person familiar with McDonald's business estimated that the McWrap requires an $1.70 price point for the raw ingredients alone. McDonald's declined to confirm or deny that figure, citing it as proprietary.)

"It seems like the answer to everything is to discount or give away food," commented a franchisee in Mr. Kalinowski's survey. "They even wanted us to sell the McWrap for $1.00 during a promotional period. Thankfully OPNAD rejected that, but we're still at a $2.00 promo price. It's a great product, why do we have to give it away?" Much of this discounted McWrap promotion is done at the local or regional level.

McDonald's did not respond to requests for comment on the Janney survey.

"It's one or the other, the Dollar Menu or other discounting. We can't continue to do both," said another franchisee in the survey. "There are no new ideas, every marketing plan focuses on discounting and giveaways. Even new product introductions rely on giveaways," wrote another owner.

Other franchisees are concerned about McWrap from an operational standpoint. "McWraps [are] great, but in large numbers are an operational nightmare and slow service," one commented in the survey. Speed of service is indeed a challenge for the company, and it has reportedly placed a new emphasis on service and friendliness of employees since Jeff Stratton became president in November 2012.

Along with most chains, this winter McDonald's faced difficult comparisons because last winter's weather was milder than usual, drawing many customers to restaurants. In September, McDonald's reworked its late-year marketing calendar to roll out the McRib in December rather than October in the hopes of goosing December sales. The company in October reported its first global sales loss in nine years, and the company parted ways with Jan Fields, its U.S. president, in November. In the wake of the disappointing sales, McDonald's in November urged its franchisees to stay open on Thanksgiving, and again compelled franchisees to stay open on Christmas after November's sales results were positive—all while increasing its value promotion to stave off any declines.

In January, CEO Don Thompson said that McDonald's "refocused our advertising to enhance support for value in the fourth quarter and we'll continue these efforts into 2013. The marketing calendar will balance large-scale food events, compelling value, ongoing entree news and strong local activity."

McDonald's is far from the only chain that periodically experiences strains with franchisees. And several rivals are aggressively marketing dollar menu and value items. Competitors such as Burger King and Wendy's in the last year have aggressively offered new products at discounts and rolled out extensive coupon drops in the hopes of stealing market share from McDonald's.

McDonald's posted a 3.3% increase in U.S. sales for the year 2012, and a global increase of 3.1%. Wall Street is estimating a first-quarter same-store sales drop of 1% globally when earnings are announced Friday, according to Thomson Reuters.

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