Not clowning around: McDonald's FD, Brian Mullens

Brian Mullens

We never mentioned the ‘R’ word. No, not recession. Ronald.
Ronald McDonald. We had intended to ask UK finance director Brian Mullens
whether he thought that perhaps the McDonald’s restaurant business would perform
better if it got rid of that clown, but it looks like he’s beaten us to it. The
East Finchley head office in north London is almost entirely devoid of any of
the garish branding you would expect the Golden Arches business to have.

In fact, apart from the sign outside and the ground floor staff restaurant –
which looks just like the last McDonald’s you were in – it would be almost
impossible to tell which company we were visiting. As for the restaurant, we are
taken aback when one of our photographer’s ideas is knocked sideways by the
total absence of Big Macs, fries, McNuggets, chocolate milkshakes – or even
anyone with a McJob: it’s 4pm, the restaurant is closed and the rest of the
staff are all hard at work. (We spot the “Hamburger Universities Worldwide” sign
and find it disconcerting that the city clocks underneath are out of synch:
Munich, for example, appears to be an hour and 20 minutes ahead of London. It’s
the sort of imprecision you don’t expect to see in America’s most
globally-standardised fast food joint.)

Clearly, we’re lagging far behind the “re-imaging” programme that Mullens is
so involved with. It’s not just signage: a wider food offering, organic milk, a
choice of different types of rainforest-friendly coffee – even free Wi-Fi. It’s
bringing in “a different type of customer,” Mullens says: “I was in a restaurant
in King’s Cross a couple of weeks ago and it was quite refreshing, actually. You
see a lot of people on PCs, drinking coffee in McDonald’s.”

The business serves a couple of million customers every day in the UK and, of
the customers who have been McDonald’s regulars the longest, Mullens says, “I
don’t think their behaviour is particularly changing with how they use us.” But
there has evidently been “a broadening of our customer base as we’ve broadened
our menu,” he says. “When you see customers go into our re-imaged restaurants,
it’s quite a change. You actually see customers double-take. I was sitting in a
restaurant in High Wycombe and it’s a lovely corner plot with floor-to-ceiling
glass and, literally, people stop and look in and think, ‘There used to be a
McDonald’s, there.’ It was almost like a comedy moment. It reminded me of a
comedy sketch with Rowan Atkinson where he bumps into a lamp post.” (This
slapstick moment is the nearest we get to talking about clowns.)

Image conscious
These things matter to Mullens – who has been the FD since the beginning of
2008, crowning a 12-year career with the company which he joined shortly after
qualifying with Price Waterhouse – and not just because, as he says, a
re-imaging typically results in a 5% to 6% uplift in sales. Mullens himself is
closely involved with the refit programme at two levels. First, he has sign-off
on which 200 outlets in the 1,200-strong chain get a share of the £90m facelift
spend each year (he’s about half way through a five-year programme). Second,
because McDonald’s splits its UK estate roughly 40:60 between owned and
franchised restaurants, he works very closely with the franchisees to help make
sure they can pay for their share of that £90m.

This relationship with the franchisees lies very much at the heart of his job
as he not only talks with the restaurant owners, but also with the banks on whom
they depend to help finance the investment programme. “A lot of my role is
engaging with the banks and how they are lending to our franchisees,” Mullens
says. The banks, in fact, are invited to the annual meeting with franchisees.
“What we look to do is have the banks understand what our business plan and our
expectations of growth are, the expectations of cash flow and inflation. Then
they’ll generally look to set up lending rates pretty much for the whole
franchise system.” So while McDonald’s may not technically be underwriting the
franchisees’ borrowings, the group’s supportive approach ought to give the banks
comfort in lending to the individual owners as though they were lending to the
A-rated corporation.

There’s a flip side: while Mullens and his team keep an eye on all the
individual restaurants’ P&Ls and balance sheets to make sure they don’t
overstretch themselves, it’s important for the entrepreneurs to do their bit to
maintain the investment programme. “When the banks are willing to lend, the
franchisees should be willing to borrow as well,” Mullens says.

So while it seems to be keeping the credit crunch at bay, as far as funding
is concerned, it’s also apparently defying the recession on the customer side.
“When people come to us, they’re actually enjoying the experience. We don’t
think people lower their expectations as customers in a recession. If anything,
they become slightly more discerning and change how much cash they want to
spend. So they won’t really want to spend £2 for a coffee if they can get a
coffee they like and enjoy for £1.20. If you look at a family, they will ask,
‘Do I want to spend £10 a head or do I want to spend £4 to £5 a head?’ When you
see customers and they’re surprised at our new imaging and using Wi-Fi in
restaurants and things like that, you know they are responding to where we’ve
chosen to invest in the business.”

Mullens’s role also includes supply chain, and that takes him into the
challenging territory of food and energy prices – and lettuce. “Lettuce is an
area that’s very interesting in terms of seasonality,” he says. “It’s amazing
how the quality of the product changes at different times of the year, you may
need to actually go back to farmers.” That doesn’t appear to be a problem with
beef, all of which is traceable back to the 16,000 farms from which it’s sourced
and which has less weather-related variation. No, the biggest problem with beef
is the fact that franchisees will forever bemoan that the cost isn’t more
competitive.

What’s your beef
Which brings us to price inflation. Last year wasn’t good in that regard.
Energy and food prices were obviously volatile, so part of the job of working
with franchisees involves explaining what the hedging strategy is given that
supply chain costs get passed on directly to the restaurant operators. There’s
not much prospect of just casually passing on the full whack as though it’s
someone else’s problem, though. While around 60% of the UK restaurants are
franchised (and that figure is heading towards 70%; it’s nearer 80% worldwide),
the McDonald’s-owned restaurants have the same cost burdens as the franchises:
if energy or food price bills start to bite the franchisees, they chew into the
company’s own margins, too.

This twin-track strategy is important, Mullens insists. “Franchisees are a
brilliant litmus test with where you are as a business. They’re great for giving
you feedback.” But, he adds, “We will always run some restaurants ourselves
because, then, you’ve got some skin in the game in terms of feeling the effect
of those [supply chain] decisions. To be a good franchisor you have to
understand about running the restaurants as well so we will always run a
significant number of restaurants in the UK – partly to understand the
business, partly for talent purposes in terms of bringing people through the
operational side of the business.”

McDonald’s is an American brand that’s gone so global The Economist
created a ‘Big Mac index’ to identify mispriced foreign exchange rates. And yet
the American headquarters in Oak Brook, Illinois, has little direct control over
the UK operation. “It’s surprisingly autonomous, here,” Mullens says. “There’s
actually a lot more influence from Europe.” He admits that you wouldn’t want to
start messing around with the recipe for the Big Mac, but he cites the pace of
re-imaging and the decision to put free Wi-Fi into the UK restaurants as a
purely British decision. In similar vein, that’s presumably why the McDonald’s
outlets in France sell Kronenbourg lager, we hint. He takes the point: “We
haven’t got close to making that decision in the UK,” he says. “But it’s a good
example of a local decision.”

Mullens also has IT in his remit, though the financial system is very much
“McDonaldised”. It seems to cause little grief – the business closes its books
within about three days of the month-end – but it may not be long for this
world, consigned to the bin that also contains McDonald’s Cola. More interesting
is the fact that Mullens is thinking about ‘the next big thing’ from the
customer standpoint: you could be ordering your grilled chicken and bacon salad
from your phone in the not too distant future. “If you look at how people
interact with mobile technology, I think people increasingly want flexibility of
payment; they want flexibility of ordering.”

It’s a rare foray into the realms of exciting new developments, even if it is
well grounded in the mantra of trying to maintain competitive advantage. In
virtually every other respect, the group just doesn’t like clowning around. Even
the strategy of taking stakes in other restaurant businesses is now languishing
with their own-brand cola. The company used to have, for example, a one-third
stake in Pret A Manger, which it bought in 2001 and sold last year. Now, the
group is unashamedly concentrating on just being McDonald’s.

McProperty
Its property portfolio is largely held as freehold or long leasehold – in fact,
Mullens would like it to be even more heavily skewed towards outright
ownership. That’s not been easy since a lot of the expansion recently has been
in big retail parks where the deal on offer is typically a leasehold. “We’re
looking a bit more at opportunities where we can extend leases and where we can
we convert leases to freeholds,” he says. That gives the business security of
tenure and protects it from the inflationary impact of five-yearly rent reviews.
That security comes at a cost in terms of flexibility, but that’s not an
advantage that Mullens or McDonald’s particularly want. “When we enter a site,
we pretty much think that’s where we want to be.” Franchise agreements are
usually 20-year deals, and that’s the time horizon that suits the property
strategy.

Any interest in financial engineering such as sale-and-leaseback deals? “No,”
is his simple answer. “There’s benefits in keeping it simple. The corporation
[ie, the US head office] got under a lot of pressure a year or two ago to take
on a lot more debt and it quite successfully resisted. At the moment it’s quite
a cash generative model that will return quite a lot of cash to shareholders.”
The plan is to hand back between $15bn and $17bn, in fact, over a three-year
period. “We really have a bit more certainty as to what our cash outlay is and
we’re not reliant on having engineered anything to generate cash so my role as
CFO is very focused on business decisions – what’s going to resonate with
customers? What are the right things to invest in? How can we strip cost out of
the business? – as opposed to getting involved in that technical or financial
engineering side of things. That’s why I enjoy the role. It is very much running
the business, dealing with franchisees who are completely on the ground.”

Time to go and, as we swap business cards, the little red round-cornered
square with the yellow M suddenly hits us in the eye. We’d almost forgotten
where we were.