Covid-19 negatively impacts McDonald’s operations

Share on facebook
Share on twitter
Share on linkedin
Share on email
Share on reddit

Covid-19 negatively impacts McDonald’s operations

Share on facebook
Share on twitter
Share on linkedin
Share on reddit
Share on email

McDonald’s Corp (NYSE: MCD) on Tuesday announced that the company may offer some franchisees rent deferrals as restaurants close or see traffic plunge. In accordance with this, the company has earmarked approximately $40 million to aid the restaurant (franchisee) owners in times of the crisis. Further expectations suggest that tens of millions of dollars will be needed to help U.S. franchisees. As an action to this the company has warned the distressed owners that selling off locations or downsizing would be an option.

Out of the 14000 locations in the U.S. that the fast-food chain owns, 95% are franchised. These chains have been greatly affected by the outbreak of the pandemic in terms of its revenues generated and the consumer traffic.

Impacts of the Pandemic

The revenue from operations decreased by 6%, amounting to $4714.4 million in the first quarter of the year. The decline was a result of the limited operations, restaurant closures, and a drastic change in consumer demand and behavior due to the outbreak of the pandemic. All restaurants that have been operating since are only on takeaway/delivery or drive-thru basis.

(Source: Business Quant)

The revenues earned in the current quarter have seen a sharp decline. The company is unable to generate enough revenues from its operations to cover all of its costs. The sales in March 2020 have dropped by 13% in the U.S and more than 22% globally.

Looking Forward to overcome the situation

The company is ready to provide financial assistance to its franchisee holders by investing around $100 million in additional funds in marketing for the recovery of the outlets. “Targeted and temporary actions” will be taken by the company in order to revive the operations of the business. Chief Executive Officer (CEO) Chris Kempczinski stated “the path is uncertain and will present further challenges. The ad spending is meant to help fuel a sales recovery in the coming months.” This was in reference to reopening stores and dining rooms that have shuttered.

With the maximum outlets of the company being franchisees, it is bringing great pressure on the company to sustain all of its ideal outlets. The company is willing to work on case to case basis to help the franchisees to look for financial solutions in the situation. The financial aids that would be provided are most likely to be in the forms of rent and service fee deferrals for operators that have a large portion of restaurants in malls, airports, and other areas hardest hit by the coronavirus pandemic.

Furthermore, as the situation tends to normalize the operations can be stabilized. With the rebounding of the sales to an extent with the opening of outlets with drive-thru’s and takeaway options the company is able to generate a minimal amount of revenues to sustain for a short time span until the situation fully normalizes.

Asset Positioning

(Source: Business Quant)

The company’s ‘Total Liabilities’ have increased a great extent as compared to the ‘Total Assets’ over the quarters. This indicates the total debt a company has in comparison to its assets. The higher amounts of liabilities indicate that the company is not in a position to cover all of its debts with the assets that it owns. The company hence, is looking for downsizing its franchises so as to reduce its liabilities in these uncertain times. If the situation continues for a long period of time without much of revenue generation, the assets of the company would get worn out under the obligations of its liabilities.

(Source: Business Quant)

The above chart indicates that the company has enough current assets to cover its current liability requirements. In the short term the company would be able to fulfill its obligations without much difficulties and hence is able to currently sustain in the market. However, if there are no operations or incomes that take place slowly the company’s current assets would start to decline increasing its obligations. The company currently has a current ratio of 1.9:1 which is a healthy liquidity situation.

For the investors

The company has a stable financial standing in the near future. But if the pandemic continues for a long period of time the company will not be able to sustain relying only on its assets and will have to look for strategies to reduce its liabilities and start operations as it can with the guidelines issued by the governments. The company would rebound itself financially once the pandemic situation normalizes and if it wishes can again open new franchises then rather than burdening themselves now.

 

Share on facebook
Share on twitter
Share on linkedin
Share on reddit
Share on email

More News

All articles loaded
No more articles to load
BQ Star Yellow 3

Get Pro for 33% off

  • Access all features immediately
  • Datasets updated every day
  • Harness the power of granular data

Offer Ends In

Starting from $59 $39 / month

Help us improve

Survey

  • Your feedback is highly appreciated.

  • It'll take less than 60 seconds.