Fast food giant McDonald's Corporation (NYSE: MCD) plans to downsize rather than supersize in order to cut losses and increase profits. The move will offset a 0.2% decline in U.S. sales and a 3.2% decline across some of its international locations. McDonald's went public with its plans to close a net total of 59 U.S. restaurants in June 2015, which still leaves the company with more than 14,000 locations across the country and more than 36,000 worldwide. The restaurant chain also announced plans to close approximately 700 locations in various countries in order to restructure its operations. The closures mark the first time that McDonald’s has closed locations in four decades.
McDonald's enjoyed rapid U.S. expansion and dominance in the fast-food marketplace due to its menu of affordably priced food. The company’s Dollar Menu even proved to be recession-proof and helped it thrive during tough economic times. While the chain restaurant remains prominent, fast food consumers are turning to restaurants such as Chipotle Mexican Grill and Five Guys Burgers and Fries and have shown a willingness to pay a bit more money for better-quality food and more interesting menu options. To mitigate financial losses created by encroaching competitors, McDonald's plans to close underperforming locations and to open a few new stores in areas where the company believes it can succeed.
McDonald's faces a deeper crisis in Japan, its second-largest market, as well as in China. Food safety concerns and a product shortage caused sales to plummet across chains in the two countries. A human tooth and plastic objects found in McDonald's food items led consumers in Japan and China to avoid the chain, which caused steep losses in the first quarter of 2015. Japanese locations also experienced a french fry shortage, which also caused a drop in sales. With 350 McDonald's locations already closed internationally, the company plans to close 350 more, including 131 in Japan. The restaurant's outlook abroad has a bright spot, as sales in Europe rose by 2.3%.
Eighty percent of McDonald’s 14,300 locations are franchised, meaning that individuals own and operate the restaurants. The corporation provides direction and resources to ensure that franchise owners maintain its image and standards. McDonald's reserves the right to close these locations, and the company plans to include underperforming franchise stores among the restaurants it will close in the hopes of spurring a financial turnaround. The move comes on the heels of a Janney Capital Markets survey putting the business outlook for franchise operators at historic lows.
McDonald's menu also came under scrutiny for being uninteresting, yet complicated to deliver. Observers suggest that the overly complicated menu accounts for long lines in restaurants and drive-thrus. Competitors, such as Shake Shack and Chick-fil-A, have reaped the benefits of customers looking for tastier foods and faster service. As confirmation that there's trouble under the Golden Arches, McDonald's came in second to last on Nation’s Restaurant News' latest consumer survey rating the quality of fast food menu items. To draw customers back to the chain, McDonald's added more beef to the Quarter Pounder and introduced the Mighty Angus, an Angus beef burger, in the Canadian market.
With worldwide closures, dissatisfied franchise owners and skeptical customers, McDonald's has a steep hill to climb to get back on top. Moves such as offering its popular breakfast menu throughout the day may boost sales, even though some of the company's stiffest competitors already offer all-day breakfast. McDonald's also plans to sell approximately 3,500 of its company-owned locations to franchise owners to decrease its operating and administrative expenses. The company still has opportunities to expand its operations abroad.