In The Headlines

McDonald’s Signals the End of Small Fry Franchisees

McDonald’s has long been famous for its small-owner-focused franchise system, in which entrepreneurs with only a store or two would sweat the details of their restaurants, yielding better customer service. Lately, however, the fast-food giant has begun shedding mom and pop owners in favor of bigger operators. Since 2014 the number of U.S. McDonald’s franchise owners has dropped 2.6%, while the number of franchised locations has grown 1.2%, according to data compiled by researcher FranchiseGrade.com. The chain’s biggest franchisees are getting larger, while those who own five locations or fewer are on the wane.

Getting rid of smaller franchisees allows McDonald’s to speed renovations and the implementation of new technology, such as the self-ordering touchscreens being tested in about 250 locations. Such gear can be expensive, and smaller franchisees often do not have the capital to pay up—making them less willing to embrace the company’s plans.

“They’re encouraging the smaller franchisees to sell out,” says Rob Hunziker, owner of Advanced Restaurant Sales, a restaurant brokerage. “When you have thousands of franchisees that you need to keep monitored or updated, it’s just difficult and expensive for the parent company.” He says the chain has increasingly pushed the shift in the past 12 months.

There are about 1,842 domestic McDonald’s franchisees who own five restaurants or fewer, compared with 1,930 in 2014, a 4.6% drop, according to FranchiseGrade.com data. There has been about a 12% jump, however, in the number of those operating more than 10 stores: 245 now, vs. 218 in 2014. McDonald’s spokeswoman Becca Hary says that stores often end up in the hands of larger operators when smaller ones sell out, but both big and small operators are among its best franchises.

In April, Chief Executive Officer Steve Easterbrook said the company is consolidating its restaurants to fewer operators in the U.S., where franchisees own five to seven locations on average. “Does that give us fewer, stronger operators and a stronger balance sheet and their ability to invest in scale?” he asks. “It could.”

Burger King, Wendy’s, Subway, and Pizza Hut all have franchisees that own hundreds of locations. But the largest McDonald’s owner in the U.S., Century Management in Memphis, has 69 locations, according to Restaurant Finance Monitor (RFM). The nine biggest McDonald’s franchisees, on average, own 40 stores, per RFM data. By contrast, Carrols Restaurant Group, the largest Burger King franchisee, has about 727 in the U.S. NPC International operates more than 1,240 Pizza Huts.

Such scale is preferable for many franchising companies, says Jeff Lefler, CEO of FranchiseGrade.com. “You manage one company vs. multiple companies, multiple views,” Lefler says. “It’s more of a business relationship.” Decades ago, McDonald’s franchised single locations, whereas other chains sold off entire regions to one operator. “The incentive to the McDonald’s franchisee was to run a great store, because that will help you get another store,” says Mark Kalinowski, an analyst at Nomura Securities. Now, as the U.S. nears saturation, with more than 14,000 McDonald’s restaurants, the chain is trying to draw more sales out of each store and closing underperforming locations. “How do you get more stores in the hands of your better operators?” Kalinowski asks. “What they’re doing today is to achieve that.”

Citations

1. http://bloom.bg/2bFR4Qb – Bloomberg
2. http://bzfd.it/2bQM7P3 – BuzzFeed.com

More Americans Choose to Buy Experiences over “Stuff”

Since he launched his company two years ago, Rob Rector has seen demand for his high-end vacation experiences skyrocket. Rector, the founder and president of Seattle-based travel company Experi, says there has been a shift in what his customers want. Consumers are no longer opting for the package tours featuring 13 cities in 12 days, with requisite stop-offs at landmarks such as the Roman Coliseum and Buckingham Palace. Instead, Rector’s clients want wine tastings and cooking classes in Provence, or boar-hunting excursions in Tuscany. And they are willing to shell out upwards of $10,000 per person to do it.

‘Invest in experiences over things, and you’ll find greater happiness’ has been the mantra of prominent psychologists such as Daniel Gilbert, sociologists, and more than a few financial planners for years. Now there is some evidence that consumers—in particular wealthier ones—are heeding that message. Consumer spending has indeed undergone a marked shift in the past 10 to 15 years, and people are spending less on durable goods—the cars, sofas, refrigerators, household appliances and other gear that are typical mainstays of both our gross domestic product and consumer life. Even purchases of clothing and shoes as a share of discretionary spending has dropped. Instead, consumer spending on recreation, travel, and eating out has been trending up for more than a decade, notes Kevin Logan, U.S. Chief Economist for HSBC.

By the numbers, total personal consumption in the U.S. has nearly doubled in the last 15 years to $12.3 trillion. Over the same time period, discretionary spending on cars and home furnishings as a percentage of total spending has decreased, while purchases of food, accommodations, and recreation services have steadily increased.

Population growth and inflation are two overriding factors that influence overall spending totals, Logan says. And certainly, there are changes in particular sectors. For example, the cost to produce clothing has come down over the years, he says, as manufacturers have moved production overseas to cut costs. There are also changes in what people consume, and how they consume it. Spending on Internet access, for example, has grown ten-fold since the 2000 Millennial Year; total spending for 2015 was still only $100 billion, accounting for less than 2% of discretionary outlays.

Yet in general, consumers today seem to have less to spend on nonessential goods than they did 15 years ago. Discretionary spending is about 51% of total consumer outlays, compared to 53% in 2000, according to Logan’s analysis. As the income inequality has gotten more extreme—a trend exacerbated by the financial crisis and its aftermath—“wealthier Americans have more money freed up to spend,” says Catherine Tucker, an economist and professor of marketing and management at MIT’s Sloan School of Management.

But even entrepreneurs who focus on less-affluent customers have noticed a shift. Greg Fisher’s website TripShock specializes in middle-class vacations to the Gulf Coast, which include experiences like dolphin watching, deep-sea fishing expeditions, and parasailing. His revenue for 2016 is on track to be about $5 million, up from $3 million in 2015.

A big reason people are willing to shell out big bucks for these experiences? Much of what consumers are looking for, Fisher says, is driven by pressures created by social media. Thanks to platforms like Facebook, Instagram, and Snapchat, customers can instantaneously share their trips through pictures and videos. “There is a drive to compete with family members and friends, if they are all going on vacation,” Fisher says, adding that consumers no longer want mementos and souvenirs. “It is the experience they are looking for.”

Citations

1. http://for.tn/2c0girZ – Fortune
2. http://bit.ly/2cksoZF – Forbes

The Good News Is . . .

• The U.S. trade deficit fell more than expected in July as exports rose to their highest level in 10 months, offering further evidence that economic growth picked up early in the third quarter. The Commerce Department said the trade gap narrowed 11.6% to $39.5 billion. Economists polled had forecast the trade gap decreasing to $42.7 billion in July after a previously reported $44.5 billion shortfall. When adjusted for inflation, the deficit dropped to $58.3 billion from $64.5 billion in June.

• Big Lots, Inc., a leading discount retailer, reported earnings of $0.52 per share, an increase of 30.0% over year-earlier earnings of $0.40 per share. The firm’s earnings topped the consensus estimate of analysts by $0.06. The company reported revenues of $1.2 billion, an increase of 0.3%. Management attributed the results to its strategic focus on ownable and winnable merchandise categories, improved merchandise presentations and more consistent in-store execution.

• Cloud company Rackspace announced that it has entered into a $4.3 billion cash deal with affiliates of Apollo Global Management to become a private firm. Rackspace agreed to be acquired for $32 per share. Rackspace has seen it revenues grow as more mainstream companies move their computing out of corporate data centers and into multi-cloud models. Under the deal, funds managed by Searchlight Capital Partners will make an equity investment in the acquired company.

Citations

1. http://reut.rs/2clz2By – Reuters
2. http://cnb.cx/1gct3xa – CNBC
3. http://bit.ly/2c00RQF – Big Lots, Inc..
4. http://on.mktw.net/2bD06v1 – MarketWatch.com

Planning Tips

Tips for Evaluating Extended Warranties

The offer of an extended warranty is now common on many products such as cars, computers, consumer electronics, mobile phones, and appliances. An extended warranty is an agreement or contract to repair, replace, or maintain an identified vehicle, residential, or other property due to operational or structural failure from a defect in materials, workmanship, and, in some cases, normal wear and tear. It is generally sold as an add-on product, and covers a specific duration of time in return for the premium paid. Extended warranties sometimes offer additional service options or more flexible terms than the manufacturer’s original warranty. These can significantly add to the price of your purchase, so it is a good idea to carefully evaluate an extended warranty to determine if it is worth the cost. Below are some questions you might want to consider.

What are the limitations of coverage? – Most warranties have limitations to protect the manufacturer in certain events. Some extended warranties require compliance with specific maintenance that is provided by the manufacturer or its representative to maintain the protection. It is important to remember that oral promises or explanations of warranty protections are generally unenforceable, so be sure to get any spoken promises about your purchase in writing (and dated) to ensure that you have the protections you seek.

Does the warranty provide extra coverage? – The limited warranty that accompanies the new product might extend to a new buyer if the sale occurred during the first year following my purchase. However, other manufacturers may limit the warranty to the original buyer. Furthermore, the stated term of the extended warranty might be misleading if it is actually the manufacturer’s original limited warranty, plus a two-year extension—the deception is intended to make the purchaser of the warranty think the coverage is greater than it is. Finally, the four major card companies–Visa, MasterCard, Discover, and American Express–may double the manufacturer’s warranty up to 12 months for free, but you should expect major exclusions, as well as required documentation for coverage.

How are claims handled? – Warranties generally include detailed instructions about reporting and processing warranty claims. For example, some companies may require extensive documentation to process claims, including original purchase documents and service records. Some manufacturers may limit their liability to specific types of repair, replacement with a refurbished equivalent product, or reimbursement adjusted for depreciation. Labor charges and shipping costs may cost extra. Finally, the process may extend for weeks before being reimbursed or your product is repaired.

Who is responsible for the contract? – Many manufacturers and retailers rely on third-party processing companies to handle claims. Reputation of the manufacturer is important as well as an indication of the potential difficulties you might face replacing or fixing a defective product.

Is there a better option? – The alternatives include buying a warranty from an unaffiliated third party or foregoing an extended warranty altogether. According to Consumer Reports, more than half of purchasers of extended warranties for automobiles do not use the warranty before it expires, and those who do spend more for the coverage itself than they save in repair costs. Extended warranties are priced to return maximum profits to the sponsors. If a warranty costs under 10% to 15% of the purchase price of your product, you are probably getting a reasonable deal.

Citations

1. http://bit.ly/2c89E1x – Consumer Affairs
2. http://bit.ly/2cwDEWQ – Investopedia
3. http://bit.ly/1ZO2Gyc – Money Crashers
4. https://nerd.me/2bRhKtc – NerdWallet.com
5. http://bit.ly/2c17BLL – Wikihow.com