McDonald's CEO Thompson 'under siege' at home and abroad

In the final days of the month, its China business was hit with a food-safety scare involving a key supplier; the chain got ensnared in the West’s sanctions standoff with Russia; burger flippers at U.S. restaurants claimed an incremental win from the National Labor Relations Board in their fight to hold McDonald’s responsible for the actions of franchisees; and, a Texas jury slapped the company with a $27 million verdict. Add to all that its results showed second-quarter profit dropped more than expected.

“They’re under siege on three continents,” said Howard Penney, restaurant analyst at Hedgeye Risk Management, an investment research firm.

To be sure, the company’s famous name and the ubiquity of its restaurants worldwide help to fuel the media storm, said Penney: “McDonald’s is a pawn in many instances around the world. It’s an easy target.”

Such upheavals are not uncommon for McDonald’s and other global power houses, including Coca-Cola Co and Wal-Mart Stores Inc, experts said, though perhaps not quite so many in such a short period.

In a statement a McDonald’s spokeswoman said: “In the last few weeks, we’ve seen issues in various parts of the world which directly or indirectly affect our brand and others. We have 35,000 McDonald’s restaurants in 120 countries, and skilled professional communications teams in every area of the world.”

She said that dealing with a 24/7 news cycle around the world is par for the course, and the communications teams address such issues so that the company can keep its focus on serving customers.

Thompson was not made available for comment.

DEFAULT BRAND

Analysts and investors said the latest, largely external events appear to pose manageable risk to McDonald’s profits, but they are a headache at a time when the company is grappling with intense competition, shifting consumer tastes and service slow-downs stemming from the menu additions of everything from salads and wraps to lattes and smoothies aimed at broadening its audience and boosting sales.

Branding expert Robert Passikoff, said McDonald’s needs to find a way to stand out from the crowd.

“McDonald’s has reached the point where it’s become a default brand. It’s there. That’s it,” said Passikoff, president of Brand Keys.

Shares in McDonald’s are up less than 7 percent since Thompson took the helm on July 1, 2012, lagging the S&P 500’s gain of nearly 42 percent in that period.

Investors, analysts and franchisees are clamoring for the company to stop trying to be “all things to all people”. They want it to simplify its unwieldy menu and point to the success of rivals like Chipotle Mexican Grill Inc and In-N-Out Burger, which have won passionate fans by selling just a few items.

McDonald’s was caught up in the latest China food safety scare after a July 20 television expose showed workers allegedly mishandling meat at Shanghai Husi Food Co Ltd, a factory owned by OSI Group LLC, a major supplier to the chain.

When the story broke, McDonald’s China business had been rebounding from the double whammy of a food safety scare and a bird flu outbreak that crushed sales in 2013.

McDonald’s roughly 2,000 restaurants in China suffered meat shortages after it ended its relationship with OSI China. Executives from the chain’s long-struggling Japanese unit, McDonald’s Holdings Co Ltd, who were forced to find alternate chicken McNugget supplies, said the scare sent sales down as much as 20 percent.

RUSSIA CONCERN

Seattle-based portfolio manager Bill Smead, whose firm Smead Capital Management holds nearly 516,000 shares in McDonald’s, took news of the China food scandal in stride.

“We assume that something is going to go amazingly haywire with companies in China,” said Smead, who added that he has ceased adding to McDonald’s holdings while the company works through its “tribulation” period.

About 15 percent of McDonald’s operating profit comes from the Asia/Pacific, Middle East and Africa unit that includes China and Japan, said Bernstein Research analyst Sara Senatore.

The bigger concern, she said, are McDonald’s troubles in Russia, where the company has about 400 restaurants.

Against the backdrop of the political tussle over U.S. sanctions imposed on Russia because of Moscow’s intervention in Ukraine, Russia’s chief sanitary inspector Anna Popova on July 25 accused the company of violations “which put the product quality and safety of the entire McDonald’s chain in doubt.”

Europe contributes about 35 percent of McDonald’s operating profit. The company does not break out country-specific contributions, but Russia “up until recently had been one of the stronger markets for them in Europe,” Senatore said.

Meanwhile at home, the troubles also piled on.

McDonald’s workers’ union-backed fight for better wages and working conditions scored points when the general counsel for the U.S. National Labor Relations Board said in a letter made public on July 29 that McDonald’s, not just its franchisees, can be held liable in complaints that the company violated employee rights.

David Hess, associate professor of business law at the University of Michigan’s Ross School of Business, said the NLRB attorney’s finding is just an early step in what is usually a long process.

As for the $27 million jury verdict awarded to family members of two teenagers who died following a beating in a McDonald’s restaurant in Texas, legal experts said that is expected to fail on appeal.

McDonald’s executives have promised to boost sales over the next 12 to 18 months by doing things like focusing on value, digital advertising and the quality of its food.

As for Thompson, Penney predicted that he will survive the current crises and gets more time to fix the longer-term problems, at least into 2015. “I don’t think he’s going anywhere. It’s too soon,” he said.-Reuters