McDonalds is seen closed in Manchester, the UK following the outbreak of coronavirus. McDonald’s has been severely affected by the pandemic-induced government restrictions, says portfolio manager Frants Preis. Photo:  Reuters
McDonalds is seen closed in Manchester, the UK following the outbreak of coronavirus. McDonald’s has been severely affected by the pandemic-induced government restrictions, says portfolio manager Frants Preis. Photo: Reuters

ANALYSIS: Quarter of McDonald’s stores close amid Covid-19

By Frants Preis Time of article published Jun 1, 2020

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JOHANNESBURG - McDonald’s is the world’s largest foodservice retailer, serving more than 69 million customers daily at about 38 000 locations in more than 100 countries. 

A new restaurant is opened every 15 hours and the corporation is the second-largest employer globally with 1.7 million employees. 

Not only is McDonald’s one of the most recognisable fast-food brands on the planet, but it is also a well-oiled real estate company that owns property worth $30 billion (R525bn). 

Part of its long-term success and profitability stems not from its world-famous food, but from its ownership of the land and buildings at most of its locations. 

About 90 percent of McDonald’s restaurants are franchised; an arrangement that increases profit margins by keeping the company’s costs down. 

More than two-thirds of its operating profit is generated through rent, royalties and fees that are paid by franchisees. 

But despite McDonald’s starting 2020 with exceptional growth momentum, the novel coronavirus has resulted in widespread mandatory closures in about a quarter of its global store base.

Franchisees are currently under significant financial strain with many unable to fully honour their commitments. In response, McDonald’s has deferred cash collections for April and May. To preserve its cash position, share repurchases have been put on hold, planned capital spending reduced by $1bn and $6.5bnof new debt taken on. These measures should help to secure its dividend payment.

The reopening of the global economy is vital for McDonald’s to start its recovery process. McDonald’s breakfast accounts for a quarter of sales, but 40 percent of profits. It benefits from people’s normal workday routines. To attract new consumers McDonald’s has been evolving its offering. It continues to experiment with regional menu items and installed digital kiosks in its stores.

Healthier options like oatmeal, wraps, salads and fruit were introduced in addition to displaying calorie counts for all its products. This is amid increased consumer health consciousness and growing accusations against the company relating to the spread of the obesity epidemic across the world.

McDonald’s has been severely affected by the pandemic-induced government restrictions. 

Consequently, results for the second quarter will likely be poor. Investors have to consider the long-term prospects. McDonald’s possesses a solid business model and a strong brand supported by an ever-increasing global population. 

Its investments into technology, order delivery and value offering given its significant scale advantage, suggest that it can gain market share from smaller competitors. 

Once consumer behaviour returns to the “new” post-Covid normal, McDonald’s is likely to see continued success for years to come – or at least for as long as health considerations are outweighed by convenience and affordability in the majority of their costumers’ minds.

Frants Preis, CFA is a portfolio manager at VEGA Asset Management based in Pretoria.

BUSINESS REPORT

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