Declaring McDonald’s Corp. Dead

Fast food in America is undergoing massive change. Menu boards resemble the Chinese stock market listing, undergoing daily fluctuations in content, cost and calories. And still consumers fail to respond. Small victories, such as the recent announcement of a 7.9% quarterly increase in sales for Burger King, are treated with celebrations of V-E Day proportions. Let’s not fail to remind ourselves how financial departments in publicly-traded companies word such things – those PR flares are advertisements aimed at institutional shareholders to hold their positions and maybe boost their value by buying in for a little more. It isn’t about the impact of the Chicken Fries at the register. Or that sales from the previous quarter were uncharacteristically depressed by the long winter. Ultimately, companies that have grown (or were merged) to the size of a Burger King morph into short-term Ponzi schemes. For a while, the ledger sheet will belie declining trends in sales and it then becomes a matter of shadow marketing the impending disaster so that it appears the ship be not sinking.

For McDonald’s, the signs are obvious that someone forgot to stow enough lifeboats. They are drastically reducing the number of company-owned stores. The board of directors is back-loading CEO compensation with soon-to-be worthless stock options. Franchisees are in open revolt over everything from the cost of assembling a McDouble to the more pressing issue of employee salaries. And formerly loyal customers are staying away in droves. One could argue that McDonald’s wounds are mostly self-inflicted, from The Dollar Menu (in response to Wendy’s) to the attempt to cater to adult tastes (whereas I had already eaten enough Big Macs in my adult years to build a garage out of the meat patties) to the total abandonment of the number one reason people went to the restaurant: to stuff the faces of their whiny, propagandized children.

Sometime in the past twenty years, McDonald’s made a ninety degree turn in advertising philosophy by virtually abandoning the pre-teen demographic and increasingly focusing advertising on African-Americans. They got rid of the clown. Consider where this comes from and consider the timing. Concerns over childhood obesity have been with us since before the turn of the century, when my daughter was a toddler, and much of the blame found an easy target with national burger chains, McDonald’s chief among them. One can imagine the board of directors sounding like the meeting of the Five Families regarding heroin trafficking in the movie The Godfather when Don Giuseppe “Joe” Zaluchi says:

“I want to control it as a business, to keep it respectable. I don’t want it    near schools! I don’t want it sold to children! That’s an infamnia. In my city, we would keep the traffic in the dark people, the coloreds. They’re animals anyway, so let them lose their souls.”

Harsh? Yes, and harsher still when we consider that this emphasis continued during Donald Thompson’s watch as McDonald’s first (and probably last) African-American CEO. McDonald’s Corp. surmised that advertising their unhealthy products would be less objectionable to the nation if the perceived targets were black adults. It was one of the few decisions they got right.

Another reason for McDonald’s falling sales numbers in comparison to relatively newer national entries such as Five Guys, Sonic and Shake Shack is the aversion we have as humans to the familiar. We’re always attracted to the strange and exotic, the new kid in school with the weird hair. You can have McDonald’s anytime, virtually anywhere. There is a comfort in that which makes it feel boring. I sensed you would be looking up at your spouse after you read that sentence.

So, why isn’t McDonald’s Corp already in the ground, after over a decade of flat or declining sales? As Jane McGrath points out in her multi-part article How McDonald’s Works, the overwhelming underlying value in the corporation is in its real estate holdings. Every franchise restaurant is a rental and the McDonald’s Corp. real estate holding company, Franchise Realty Corporation, is the landlord. McDonald’s real estate is like BlackBerry’s cash – it bestows a certain value over and above actual performance results and allows the company to report the assets accordingly. This is where the similarity to a Ponzi scheme takes hold. Once the franchises begin to fail en masse, the rental incomes disappear. The property taxes previously covered by the franchisees revert to the corporation. If a new franchisee for the location can’t be found, the property is sold. Done enough times without commensurate regeneration results in the eventual withering of a company, if not an industry.

Admittedly, it seems as though we are living in the middle of the Jurassic Age waiting for the dinosaurs to die off. McDonald’s Corp. is a big organism and its extinction feels remote. Such monumental disasters never happen overnight, until the one night when they do. As a guard against inevitability, I’ll have to remember to periodically stop in for a Big Mac sandwich and revel in the possibility each time that it may be the last time I wipe a dab of Special Sauce from my cheek.