McDonald's

McDonald's Caps Off a Truly Terrible Year With Falling Sales, Discrimination Lawsuit

The best thing about 2014 for McDonald's is that the year from hell is finally over – or so it hopes, as it looks to turn over a new leaf in 2015.

On Friday, the fast-food giant released its latest earnings report, which showed that global same-store sales for 2014 were down a full 1 percent from last year. In the fourth quarter, same-store globally fell 0.9 percent and sales in the U.S. dropped 1.7 percent – both smaller-than-expected falls than predicted by analysts.

Still, it's hard to look at the numbers and see the positives after a year filled with scandals and slumping sales domestically and internationally.

"2014 was a challenging year for McDonald's around the world," McDonald's CEO Don Thompson said in a statement. "As we begin 2015, we are taking decisive action to regain momentum in sales, guest counts and market share."

McDonald's plan for gaining momentum includes working to build back trust and sales in China and Japan following last summer's supplier scandals, simplifying and localizing the menu, and making significant cost cuts.

Related: McDonald's Franchisees Brace for Sales Slowdown

"As we begin 2015, we're exercising further financial discipline - starting with a capital expenditure plan for the year of approximately $2.0 billion - our lowest capital budget in more than 5 years - as we're strategically targeting fewer openings in our most challenged markets," Pete Bensen, McDonald's CFO said in a statement. In other words, 2015 will bring fewer new McDonald's locations in China, Russia and the U.S. 

The company is simultaneously trying to overturn its image as an aging fast-food brand that offers customers little in the way of choice and quality. Thompson noted that in 2015, McDonald's would be dedicated to "adapting to the changing marketplace." That seems to indicate investing in fast-casual friendly items, like new tech in the form of the “Create Your Taste” platform, which will allow customers to build their own burgers and chicken sandwiches, and incorporating higher-quality ingredients. But is McDonald's putting too much on its plate by bringing in new, potentially brand-building features?

"From ineffective digital strategy to 'Experience of the Future', 'Our Food Your Questions,'  'Create Your Taste,' and regionalization to streamlining its menu, and its most recent ad campaign, McDonald’s strategy seems unfocused, even schizophrenic at times," says Sriram Madhusoodanan, campaign director at activist group Value [the] Meal, in a memo on the earnings report.

Ironically, McDonald's biggest success is leading to its biggest challenges. Its enormous size of more than 36,000 locations makes it difficult to pay attention to the minutia worldwide, even as the chain emphasizes cooperation with owner/operators and works to refranchise at least 1,500 restaurants from 2014 to 2016.

"Overall, I continue to see McDonald’s in defensive mode; beleaguered by the significant challenges to its business model that placed such a burden on its top and bottom line last year," says Ken Odeluga, a senior market analyst at CFD Trading firm CityIndex. "McDonald's continues to experience a sea change in fast food consumption in America and it remains questionable whether it is responding fast enough to catch up. Chains like Burger King and Chipotle are smaller and nimbler, and therefore have reacted faster."

Related: McDonald's Lays Off Employees as Part of $100 Million Cost-Cutting Effort

The company is also facing issues that will likely follow the company into 2014 on the legal side of operations. In addition to preparing for increased costs with the Affordable Care Act and states' rising minimum wages in 2014, McDonald's was forced to contend with a threat to its very business model in the ongoing "joint employer" debates sparked by the National Labor Relation's Board decision that McDonald's would be held accountable in employee allegations against the chain.

The limits of the definition of joint employer will soon be put to the test. This week, 10 former workers at three McDonald's locations in Virginia filed a federal civil rights lawsuit against McDonald's Corp. and Michael Simon, the owner of the franchised location, with allegations of racist discrimination.

The ex-employees say that they were fired from McDonald's after racial and sexual harassment from supervisors, who complained "there are too many black people in the store" and ultimately replaced about fifteen African-American employees with white workers. McDonald's Corporate allegedly did not respond to employee complaints.

This is not an unprecedented case – in August, the California Supreme Court ruled that Domino's could not be held accountable as a franchisor in a former employee's sexual harassment lawsuit. However, the decision also stated, "[We do not] mean to imply that franchisors, including those of immense size, can never be held accountable for sexual harassment at a franchised location."

If prosecutors find that McDonald's corporate exerts enough control over employee hiring, firing and training in this case to have tacitly – or explicitly – approved of racist employment practices, McDonald's franchise model will likely have to make some major changes that could affect the entire franchising industry.

"Decades of established law demonstrate that franchisors do not control the terms and conditions of the employees of their independently-owned and operated local franchise businesses," an International Franchise Association spokesperson said in a statement on the case. "IFA will contend in the appropriate forum any attempt to change the current joint employer standard to preserve the sanctity of the franchise model to ensure its continued economic growth."

McDonald's has so far declined to comment on the allegations, and reiterated its dedication to diversity in a statement.

2015 may be a new year, but McDonald's isn't going to be able to escape old challenges, from the effects of the joint employer decision to struggles keeping up with the fast-casual industry. The company promises to make a change – now, it’s time to see if their customers will be "lovin' it." 

Related: Judge Rules Against Joint Employer Responsibility in Minimum Wage Case

Edition: December 2016

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