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Morning Briefing for pub, restaurant and food wervice operators

Fri 13th Mar 2015 - Friday Opinion
Subjects: McDonald’s underlying strength, nationalised pubs, limits of partnership and hidden costs of protecting the future
Authors: Paul Charity, Martyn Cornell, Paul Chase and Martyn Roslyn

McDonald’s underlying strengths by Paul Charity 

McDonald’s is battling to renew its relevance in its key US domestic market, in particular, with last month’s like-for-like sales showing a chunky 4% erosion of sales on a like-for-like basis. Sales in Asia are also seriously challenged, with Europe the behemoth’s brightest spot in performance terms. But this is a company that has reinvented itself over and over – and I, for one, would not bet against its current travails being overcome.

I have spent several hours reading the company annual report and think it is worth reminding ourselves of some of its core strengths. So here’s my list of ten lesser known McDonald’s facts.

1. Franchisee network: McDonald’s constantly adjusts the mix of company-owned sites and those that are franchised, allowing the company to capture profits and defray costs according to site and country profitability. Currently, around 80% of sites are franchised. 

2. Property ownership: Under a conventional franchise agreement, McDonald’s owns the land and building. McDonald’s believes the ownership of real estate “enables us to achieve restaurant performance levels that are among the highest in the industry”. In other words, property ownership is a long-term bet on out-performance.

3. Long-term franchisee relationships: McDonald’s believes in forging very long-term relationships with franchisees, which is a way of creating commitment. Its typical franchise term is 20 years. It stresses that it “generally does no work with passive investors”. Its lease agreements flex to reflect turnover – there is normally a specific minimum rent payment topped up by royalties as a percentage of sales.

4. Licence agreement variation: Trading in more than 100 countries, McDonald’s has a variation to the traditional franchisee agreement it calls the “development licence agreement”. Under this strategy, the licensee provides capital for the entire business, including the property interest. A capital-lite development plan, McDonald’s receives a royalty based upon a percentage of sales and a fee upon the opening of a new restaurant or the grant of a licence. This structure is used in 70 countries, covering 5,228 restaurants.

5. The foreign affliate variation: Another variation to the franchising model is to make an equity investment in a limited number of foreign affiliated markets. In these markets, the company receives a royalty based on a percentage of sales. The largest of these affiliates is Japan where there are nearly 3,100 McDonald’s restaurants. 

6. Supply chain assurance: McDonald’s has “quality centres” around the world designed to ensure that high standards are consistently met. The quality assurance process not only involves ongoing product reviews, but also on-site visits. Each “quality centre” has a quality leadership board, composed of the company’s technical, safety and supply chain specialists, producing regional leadership for all aspects of food quality and safety.

7. Market share capture: McDonald’s monitors research undertaken by Euromonitor International, that estimates the global informal eating out market (where McDonald’s believes it sits) is composed of circa eight million outlets and generated $1.2 trillion sales in sales in 2013, the most year for which data is available. In 2013, McDonald’s accounted for 0.4% of those outlets and 7.5% of their sales. The wider global restaurant industry is composed of circa 17 million restaurants generating $2.3 trillion in annual sales in 2013. McDonald’s system-wide sales accounted for 0.2% of these outlets and 3.8% of the sales. By contrast, no UK company has managed to capture more than 3% of sales in its home market.

8. Staff and restaurant numbers: McDonald’s employs 420,000 staff. With franchisees accounting for 80% of units, total numbers employed within the entire McDonald’s system is likely to be circa two million. At the end of 2014, it had 36,258 restaurants in 119 countries. A total of 29,544 are franchised (of which 20,744 are franchised conventionally, 5,228 are licensed to developmental licensees and 3,542 are licensed to foreign affiliates). McDonald’s runs 6,714 sites directly.

9. Dividend record: McDonald’s has paid dividends for 39 consecutive years through to2014 and has increased the dividend amount at least once every year. As of 31 January, 2015, it had 1,633,000 shareholders.

10. Europe is McDonald’s biggest market: Not generally well-known is that Europe is McDonald’s biggest market accounting for 40% of total revenues – the US accounts for 32% of revenues and Africa, Asia and the Middle East (known as APMEA) produces 23% of sales. It identifies seven major international markets by country – the UK, France, Russia, Germany, China, Australia and Japan. These, with the US and Canada, account for 75% of total revenues.
Paul Charity is managing director of Propel Info

Nationalised pubs? We’ve been here before by Martyn Cornell

You probably saw reports of the declaration by Chris Snowdon, the libertarian polemicist and Director of Lifestyle Economics at the right-wing think-tank the Institute of Economic Affairs, that by 2020 we could see the nationalisation of some pubs, as the natural outcome of the policies pushed by the Campaign for Real Ale and the anti-pubco lobby. Snowdon’s argument is one that has been presented here: the changes in the law CAMRA and the anti-pubco movement want to see brought about will not save pubs, but will instead cause more to close.

The outcome, Snowdon says, is likely to be a large number of premises that cannot be economically run as pubs, because of the abolition of the beer tie and the imposition of “market rent only” agreements, resulting in rents that are actually too low for the pubcos to profit from, but that cannot be sold off for other uses because of the changes in planning laws that CAMRA is lobbying so hard for, in an attempt to preserve our pub stock in amber. The result: even larger numbers of boarded-up, vacant pubs. When that happens, Snowdon suggested, CAMRA (and probably local authorities and other groups as well) will lobby for the government to step in and buy all the closed “Assets of Community Value” to run itself, on behalf of the supposedly deprived community. Suddenly the “minister for pubs” at the Department for Culture, Media and Sport will actually be running pubs, rather than pontificating about them.

My first thought on seeing the headline “Pub industry could be nationalised by 2020” was that we’ve been here before. Many readers will have heard of the Carlisle and District State Management Scheme, where the pubs – and the breweries – in and around Carlisle were nationalised during the First World War, in an effort to control the supply of alcohol to workers from the huge munitions factories nearby at Gretna Green. As is the way of such efforts, nobody got round to denationalising Carlisle’s pubs after the war ended, and they remained in government ownership from 1916 to 1971, when Edward Heath’s Conservative government finally sold them off. The “Carlisle scheme” was held up by temperance reformers through the 1920s and 1930s as an example that should be applied to the rest of the country: in 1931 a Royal Commission on Licensing produced a report that suggested state ownership of pubs should be brought in for any district where there was a “superfluity of licences”, as a speedy way of reducing pub numbers. One member of the commission, Lady Simon, a Liberal Party politician from Manchester, produced a minority report calling for state ownership of ALL pubs.

The Royal Commission produced its report in the middle of a financial crisis in Britain, caused by the Great Depression. That crisis had resulted in the Chancellor of the Exchequer, Philip Snowden, bringing in a budget in 1931 that included, among other measures, a 40% rise in beer duty, equivalent to an extra penny a pint, or about 25% more on the retail price. Consumption crashed as a result, down 20% on the 1920s. Too high beer taxes cause drinkers to drink less: who knew? Anyway, it was certainly not a time when any government could contemplate spending money buying pubs, and the Royal Commission’s recommendation was ignored.

But what about Chris Snowdon’s prediction of at least some pubs being nationalised by 2020? Speaking on BBC West Midlands Radio last week, he admitted that the prediction was made “as a slight provocation”. However, he repeated that “I think it is possible that certain pubs may be taken over by the government if the Campaign for Real Ale and other pressure groups carry on the way they are going, demanding more and more government intervention into the pub industry”. The irony, for Snowdon, is that as he told the radio station: “The government is largely responsible for the situation that pubs find themselves in: pubs are terribly over-taxed, not only with alcohol duty, but with VAT at 20%, and we’ve got the smoking ban, which has been devastating for many pubs. So I think the government needs to back out. But what the Campaign for Real Ale are doing is demand that the government do more and more to paper over the cracks of the problems that the government itself has created.”

What could lead to pub nationalisation, Snowdon said was CAMRA’s campaign “to ‘protect’ pubs, to make them almost national heritage sites. So pubs can now apply to become ‘Assets of Community Value’, which means that you need planning permission to change their use. So if you put yourself in the position of one of the pubcos, they can’t make money from the beer, they can’t make money from the rent, so they decide to sell the pub, but they can only sell the pub as a pub. And if there’s nobody in the market for a pub – and considering where the pub trade is, there’s not thousand and thousands of people queuing up to buy pubs at the moment, then you end up with a derelict pub – another derelict pub.” At that point, in the Snowdon scenario, the call comes for the boarded up “Asset of Community Value” to be bought by the government so that the community can enjoy the asset it has been so cruelly deprived of.

Far-fetched? More idiotic things have happened, caused by politicians who saw a situation they did not like, but failed to understand. The idea that those pubs are failing because there are not enough customers to go round, and keeping them open artificially only harms the entire trade, is not one that will occur to those who push for such a policy.
Martyn Cornell is managing editor of Propel Info

The limits of partnership by Paul Chase

I wrote recently about the growing number of police forces starting “voluntary” breathalyser schemes whereby door supervisors are armed with this equipment and expected to breath-test customers. And ALMR’s chief executive Kate Nichols wrote an excellent piece in last Friday’s Propel Opinion in which she linked the use of breathalysers with the growing and indiscriminate insistence by police on the introduction of ID scanning equipment, and the use of sniffer dogs to detect drugs. I make no apology for returning to this subject today.

I am hearing a growing number of complaints from licence holders about how these schemes are introduced and “voluntary” isn’t the right word to describe them. Licensees are increasingly being told that if they don’t agree to use breathalysers they will be letting the side down; that their premises is the only one in the area that is resisting and that they will be “looked at” if they don’t “volunteer”. This makes a mockery of the idea of partnership and is just a form of bullying. I think it is really important that national operators who are, in my experience, opposed to such schemes, do all they can to support their managers and make their opposition clear.

There are a number of reasons why this practice needs to be resisted. Firstly, we all accept that the night-time economy needs to be controlled and that in premises that have a history of problems it might be necessary, for example, to search customers. But searching people in certain premises is about determining what they have on their person, whereas testing a customer’s breath is about determining what they have in their person. Once we agree that it is part of our responsibility as operators to determine that, a very significant line has been crossed.

It was recently announced that in addition to using breathalysers at the roadside, police will now be able to deploy mobile drug-testing kits. These work by taking a swab – a “lollipop” is how it was described to me – and stroking it down the middle and then both sides of the tongue. You then insert the lollipop into a tube and it tells the tester whether the subject has taken cocaine, ecstasy or cannabis – and apparently whether they have an excess of certain medicinal drugs in their system.

The important thing to note about these tests is that they are conducted by police officers at the roadside to detect drunk-driving or drug-driving – both of which are criminal offences. Once operators accept the logic of deploying breathalysers on a queue of customers then it becomes impossible not to accept the logic of deploying drug-testing kits. I haven’t heard of this happening yet, but there is increasing use of sniffer dogs. So watch this space. This is a typical case of the police seeking to test the boundaries of an existing power or procedure to see how far it can be extended as a wider instrument of social control.

Another point to bear in mind is that whilst police use of breathalysers is about the detection of crime and improving road safety, door supervisors using breathalysers in order to detect “drunkenness” – howsoever defined – are not actually involved in detecting crime, even if it was deemed to be their job to do so. Most people are surprised to discover that simply being drunk is not an offence. The offences in the Licensing Act that deal with disorderly conduct and drunkenness make it an offence to serve a drunk, or to fail to stop another member of staff from doing so if you are in a position to stop them; it is an offence for a person to try and obtain alcohol for a drunk; an offence for a drunk to refuse to leave licensed premises when ordered to do so by a constable or “authorised person” and an offence for a drunk to enter licensed premises if an authorised person has refused them entry. And finally it is an offence to behave in a disorderly manner whether you are drunk or sober. But simply being drunk, as such, is not an offence!

Partnership working between police, door supervisors and managers works best when all parties understand where their respective job roles begin and end. Door supervisors are not uniformed agents of the State, and we mustn’t allow them to be co-opted in this way. So the deployment of breathalysers in the night-time economy is essentially a finger-wagging exercise, and an attempt to socially engineer sobriety by recruiting door supervisors to the Lifestyle Police, and we need to stamp all over it.
Paul Chase is a director of CPL Training and a leading commentator on on-trade health and alcohol policy

The hidden costs of protecting your future by Martyn Roslyn

With the advent of Auto Enrolment passing largely unnoticed in the licensed trade, as the timescale for implementation seemed so far away, now is the time to revisit the immediate and future cost to our industry and small businesses across the country over the next few years.

Auto Enrolment is a way of putting money aside for our future retirement costs as successive governments have failed to do so. Added to this the ageing population and the so-called results of the baby boom of the 1960’s that will come to retirement age over the next 10-15 years. The net result is a huge funding gap.

Frankly speaking, there isn’t enough money to pay all the pensions and benefits that will be required in the 2020s, so the government has implemented Auto Enrolment as a way of guaranteeing anyone that is over the age of 21 and earning more than £10,000 will pay, over the coming years, up to 4% of their salary to the pension fund, although it could be argued that through our National Insurance we have already funded this. The fact of the matter, though, is that Auto Enrolment is coming and coming fast. Some larger companies have already started offering this facility.

Over the next 18 months all companies, whether it be one member of staff or 100 must provide auto enrolment. One hidden cost is in providing this facility; a company such as mine will need to pay in costs and employers contributions over £40,000 a year once the full percentage cost of the Auto Enrolment structure is live. And although the government currently advises that the maximum the employer may need to contribute is 3% of salary for now, we all know that once the fee is established the rate will rise and rise. So employers are giving each eligible employee a minimum of 1% pay-rise per annum. The cost to an average business with, say, five staff is over £10,000 per annum.

There is a common consensus with my colleagues in various payroll bureaus up and down the country that the up-front cost to individual businesses, in addition to the scheme costs, whether there is one member of eligible staff or 50, is between £350 and £600 per business. This can’t be completed manually without huge staffing costs – it has to be by means of software, which is expensive. If, for example, we set up a new client for payroll services we would need to charge an up-front fee of around £450 to cover the additional work, costs and license through our software provider. In addition to this, we would need to increase our payroll serving fees by some 25% to cover the on-going cost of furnishing the pension provider with weekly or monthly information.

There are already too many business owners paying cash in hand to staff to avoid costs. There is an argument to suggest that this will encourage the practice – or at the very least it could discourage small businesses from employing staff and growing to the next level of profitability at all.

The concern for the long term future of industry is that in order to avoid these costs employers will opt to employ more part-time staff or more transient staff who by definition would not be as well-trained or experienced leading to a fall in customer service and quality standards.

So the next time we rejoice in a beer duty cut, do it with a muffled groan – the benefit is more than reversed by the cost of providing auto enrolment.
Martin Roslyn is managing director of Roslyns accounting

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