McDonald's Corp. announced Tuesday that it is planning on increasing cuts on general and administrative costs to $500 million. In addition, the latest part of its turnaround plan is to take on more debt, as well as return more cash to shareholders.
Based in Oak Brook, Illinois, McDonald's Corp. reportedly plans to refranchise its 4,000 restaurants by 2018. The quick-service operator said its long-term goal is to be 95-percent franchised by the said year.
However, McDonald's reportedly let go of making profits through real estate, which would disappoint several investors who thinks a move into real estate would be a key strategy in increasing their shares.
According to McDonald's Chief Administrative Officer Pete Bensen, the company "closely considered" a REIT, or real estate investment trust, because of the trust's possible advantages on tax and its valuation on Wall Street.
According to Reuters, shareholder Glenview Capital's chief executive, Larry Robbins, was the one who lobbied for the REIT. The news publication adds that real estate has become an important factor in the business of McDonald's. The company reportedly collected rent from franchisees, which has further increased by 26 percent from 2009 to 2014. When McDonald's sales and profits dropped in 2014, rents hold more than 22 percent of the company's revenue,
However, McDonald's still opted to nix the REIT and consider it too risky to its relationship with franchisees and turnaround.
"We do not view a real estate transaction as significantly compelling to move the brand forward," Bensen said Tuesday at the company's investor day presentation.
As McDonald's let go of a REIT, it still went and decided to cut another $200 million from G&A spending, and this in addition to its previous $300 million cuts.
According to the company, the cuts would come through refranchising efforts, corporate streamlining, as well as efficiencies in Global Business Services.
The company also announced plans of adding a "meaningful amount of debt" that would take advantage from the market's low interest rates. McDonald's will also be returning $30 billion in cash to shareholders spanning three years, and ending in 2016.
McDonald's decision of adding more debt is likely to downgrade their credit rating. It's also unusual for a company that holds traditional views toward debt, according to Nation's Restaurant News. McDonald's reportedly does not like risking credit since some operators benefit from the credit rating as the fast food giant borrows money from them.
"The new leadership team is acting aggressively and with fresh perspective to improve all aspects of the business," according tot Bensen. "We're committed to raising the bar on all aspects of our financial performance."
The recent plans come as McDonald's reportedly showed signs of a turnaround, albeit early, after three years of weakness. This weakness eventually led to important management changes during spring, and the promotion of Steve Easterbrook to CEO.
Its first increase in same-store sales in two years at all major markets happened during the third quarter of the year.
According to McDonald's USA president Mike Andres, the company has also outperformed quick-service burger restaurants during in September for the first time in 71 weeks.
Executives are now reportedly expecting sales growth to continue in this quarter of the year. They also acknowledged the chain's all-day breakfast decision in October, a move that has been performing well since its launch October 6.
McDonald's is now planning how to bring in more customers, while also rethinking value menus as well as further renovations of its restaurants.
