In a note on Thursday, Nomura-Instinet analyst Mark Kalinowski raised his same-store sales estimate for McDonald's first fiscal quarter, ending March 31, based on a franchisee survey. Kalinowski upped his forecast by 2.7%, and now expects a 0.8% year-over-year sales increase. His estimate is the highest among sell-side analysts, which on average predict a 1.1% sales decline.
Nomura surveyed 31 U.S. franchisees with 243 stores total. Results were strongest at the 66 stores in the West, where same-store sales rose 2%. The Northeast's 66 stores and Central region's 50 stores reported sales increases of 1.5% and 1.1%, respectively. Only the South, with 70 stores, reported a decline, of 1.1%.
Franchisees attributed the sales results to a variety of factors, with many singling out good weather, a growing economy and solid consumer confidence, which according to a Thomson Reuters Ipsos report is at its highest level since the Great Recession.
While some franchisees are indifferent toward McDonald's "Experience of the Future" digital developments, including self-service kiosks and table service, many welcomed the improved technological offerings, especially the mobile app expected later this year.
"Younger customers avoid quick-service restaurants due to lack of technology and they don't like dealing with people so the app will help," said one franchisee. "There's no doubt we need to be part of the smartphone generation," another added. Other fast food companies, including Starbucks (SBUX) , Domino's Pizza (DPZ) and Yum! Brands' (YUM) Taco Bell, generate significant sales through their apps.
Only a few looked forward to new menu offerings, like fresh beef, and one touted "the fool-proof espresso machines (compete better with Starbucks (SBUX) )." McDonald's has tried to increase its coffee sales, revamping its McCafe coffee and undercutting Dunkin' Brands Group (DNKN) on price, and adding healthier menu offerings.
However, McDonald's franchisees are dissatisfied with their relationship with the corporation. On a scale of 1-5, with 1 being poor and 5 being excellent, the average response was 1.69, in line with the 1.67 Nomura found three months ago. Many franchisees told Nomura that smaller operators were being pushed out.
"This is no longer a franchise business, it's a job where you can be fired on the whim of a corporate suit," said one franchisee. Another said, "Every year, McDonald's becomes a higher-risk investment."
"In general, we argue that corporations who have franchisees on board and enthusiastic about senior management's plans and strategy tend to fare better in general than those that don't enjoy this type of a situation, all else equal," Kalinowski wrote.
It's hard not to blame some franchisees for their sentiment in light of being asked to make pricey investments in kiosks and coffee machines. Plus, they are being kept out McDonald's board room.
McDonald's board is recommending investors vote against a proposal looking to add a "franchisee director", or a person on the board recommended by franchisees. "The board is against any plan to give one group or constituency the right to elect its own director to represent limited interests, which could be contrary to the long-term, best interests of shareholders," McDonald's wrote in its proxy statement filed April 13.
McDonald's is set to report its first-quarter earnings on Tuesday.