18 Jul

Must-know: McDonalds’ risks

WRITTEN BY Adam Jones

McDonalds’ risks

While the restaurant industry, which can be accessed through the PowerShares Dynamic Leisure and Entertainment ETF (PEJ) and the PowerShares Dynamic Food & Beverage ETF (PBJ), is susceptible to a wide array of risks of macro and micro factors. As a huge global brand, McDonalds (MCD) faces unique risks. Let’s look at some of them below.

Must-know: McDonalds’ risks

Operational risk

There have been several labor strikes and protests against McDonalds by its workforce relating to matters such as increasing minimum hourly wages and the right to unionize. The Guardian reported the most recent protest occurred on May 21, 2013 in Chicago. Strikes have also taken place against Yum! Brands (YUM) and Burger King (BKW) according to Investors.com and the Huffington Post, respectively.

Currency risk

At the end of 2013, McDonalds had 40% of its debt denominated in foreign currency. The Euro, Australian Dollar, British Pound, and Canadian Dollar represented 65% of McDonalds operating income over the same period. The management estimates about $0.25 change to the earnings per share if any of these currencies moved even by 10%. A $0.25 change would be a 20% change in the earnings per share (or EPS) of $1.21 as of the quarter ending March, 2014. Compared to other risks, financial risks can be mitigated through various hedging instruments. Sometimes these risks are mitigated due to natural hedging—if the revenues declined, the costs would also decline.

Legal risk

Operating in developed markets like the U.S. and Europe, McDonalds faces tighter regulations. Some regulatory changes include printing nutritional content on items, product packaging, taxation, and marketing to the children. This could translate into higher costs of compliance. For example, effective January 1, 2012, McDonalds had committed itself to The EU Pledge, in which it would fulfill nutritional criteria for items advertised to kids under the age of 12. In the same effort McDonalds also committed to not engage in communication to primary schools in Europe.

Reputation risk

There have been several studies and some criticism surrounding McDonalds, on a broad range of topics such as food quality and treatment of employees. All of these contribute to changes in consumer perception of McDonalds and the food it serves. Trends in food habits, such as a move towards a healthier menu, also impact sales when McDonalds can’t keep up with the demands. Introducing a healthier menu and changing the image from a junk food restaurant to a healthy food restaurant poses a huge risk due to customer’s set perception about McDonalds. Also, a lot of the marketing budget is already committed to the existing items.

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