

McDonald’s Has to Do More Than Manipulate Its Stock Price - riqbal
https://hbr.org/2015/05/mcdonalds-has-to-do-more-than-manipulate-its-stock-price

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tim333
The authors argument seems a bit muddled:

>The losers. A prime means of value extraction, stock buybacks snatch returns
from workers and taxpayers who have contributed to the value-creation process.

A company buying back stock does not really "snatch returns from workers and
taxpayers." They use earnings to buy shares back. If they overpay then the
people selling their shares gain, the remaining shareholders lose out and if
they underpay visa versa. Workers and taxpayers are not directly effected.

~~~
cgearhart
As has been argued both on HN [1] and by McDonald's itself [2], fast food
worker salaries can't be raised because it'll kill jobs since the money has to
come from _somewhere_ and the businesses can't afford it. But from the
article:

>"In 2014, McDonald’s expended $3.2 billion each on buybacks and dividends,
equivalent to 134% of its net income... ...to help finance the plan,
McDonald’s would...take on more debt...and find $300 million to cut in general
and administrative expenses."

I would say it's pretty clear there that workers are being directly affected,
and previous studies of minimum wage [3] have shown that public assistance
(including welfare and health benefits) act as a public subsidy of low wage
workers.

Stock buybacks are valuable to executives whose compensation packages are
largely tied to stock, and short-term stock holders. It is less clear that
they provide long-term value; especially when they're financed through
aggressive value extraction as these appear to be. The money _does_ have to
come from somewhere -- and in this case it appears to be at the expense of
long-term investment, squeezing the franchises & workers, and by taking on new
debt.

[1]
[https://news.ycombinator.com/item?id=9459625](https://news.ycombinator.com/item?id=9459625)
[2]
[http://thinkprogress.org/economy/2013/08/22/2509161/mcdonald...](http://thinkprogress.org/economy/2013/08/22/2509161/mcdonalds-
minimum-wage-kill-jobs/) [3]
[http://democrats.edworkforce.house.gov/sites/democrats.edwor...](http://democrats.edworkforce.house.gov/sites/democrats.edworkforce.house.gov/files/documents/WalMartReport-
May2013.pdf)

~~~
tim333
> fast food worker salaries can't be raised because it'll kill jobs

There are a number of separate issues here:

1) Could McDonnalds pay higher salaries? No doubt the management could though
they'd probably argue their responsibility is to pay market rate and to give
profits to the shareholders.

2) Should the US raise the minimum wage? Your link [2] is on whether raising
the minimum wage would reduce job opportunities. Probably it would - supply
and demand and all that. It's a trade off.

3) Are stock buy backs a good idea? I'd argue this is a separate issue to
workers pay and is really down to what the management and shareholders think
is the best use of the shareholders money.

~~~
cgearhart
> ...responsibility is to pay market rate...

That might be their corporate responsibility, but they also have a social
responsibility in that the conduct of their business should not overly burden
the public. The link I referenced was meant to point out that when minimum
wage doesn't cover the cost of living, those workers end up relying on public
assistance to make up the difference.

> ...whether raising the minimum wage would reduce job opportunities. Probably
> it would...

A study from 1992 on the effect of a minimum wage hike along the NJ/PA border
found that there was not a significant impact from raising min wage. [1] The
study has been alternately challenged and confirmed since then by other
studies, but we will be getting a lot of new data from the recent increases to
$15/hr in major metro areas of the US in recent months.

As for "should we", it all depends on whether you think corporations or
government should be responsible for providing a living wage. Many folks point
out the minimum wage is primarily intended for young people, but it's not
being used that way anymore. And, in fact, other places have adapted without
terrible consequences. Australia, for instance, has a juvenile minimum wage
around $6.60/hr (USD), which doubles for adults.

> Are stock buy backs a good idea? ...down to what...is the best use of the
> shareholders money.

The point here is that McDonalds is making mutually exclusive arguments. On
the one hand, they say they don't have the money to raise wages. On the other
hand, they have so much money that they can initiate stock buybacks. The
status quo requires public assistance to cover the wage gap between minimum
wage and living wage, so until McDonalds picks up that tab both workers and
taxpayers are being affected.

I have nothing against stock buybacks, but it seems hypocritical in this case
given the circumstances.

[1] [http://www.nber.org/papers/w4509](http://www.nber.org/papers/w4509) [2]
[http://en.wikipedia.org/wiki/Minimum_wage_law#Australia](http://en.wikipedia.org/wiki/Minimum_wage_law#Australia)

------
tdees40
This is a deeply strange article. Why are stock buybacks manipulating? If
there are 100 shares of a $1M company, each share is worth $10K. If I own 800
shares and you own 200, and the company has some cash lying around, maybe it
will buy your shares. Now there are 800 shares outstanding, and if the company
is still worth $1M, each share is now worth $12,500. Did I _manipulate_ the
share price? What's the point of calling it that, besides to make it sound
nefarious, when it's just an everyday business practice?

~~~
justaman
By manipulating stock price they change the dividend play. I suppose they are
attempting to instil the idea that they are not going anywhere in the minds of
investors.

IMO the issue McDonald's is facing is the degradation of its public image.
Simply put, McDonald's is what homeless people eat(low in price, high in
calories). In the last two or three decades new burger joints have emerged
that fill the gap between the dollar menu burger and the $10 restaurant
burger. Places like Culver's and In-and-Out have taken a larger slice of the
_burger_. You can see them combating this with the aggressive advertising
towards millennials; the trend-setters. The new non-GMO simple chicken
sandwich is a glaringly obvious admittance that their prior adverts failed.

To fix McDonald's, their only option is to use their superior distribution
network to produce marginally higher quality food that is on par with the
aforementioned. The perceived public image will improve itself overtime.

~~~
tdees40
It's hard because McDonald's has negative brand equity in a lot of people's
eyes (certainly in mine). It would almost be better if they were starting from
scratch.

------
paulpauper
Everyone talks about McDonald's like they are doing something wrong, but as
evidenced by the recent strong performance of the stock price, they are doing
exactly what Wall St. expects, which is to provide mass-produced ,
uninteresting food to billions of consumers all over the world, which is a
very profitable business and they have returned billions to shareholders in
the form of a very high dividend. You cannot compare McDonald's with Chipotle
or Shake Shack..it's a completely different business model and economy of
scale. McDonald's is not dead, dying , or going away..they are just being
McDonald's, that all.

~~~
arbuge
Not sure what recent strong performance you're referring to. Here's a
comparison against the S&P 500 for the last 5 years:

[http://finance.yahoo.com/echarts?s=MCD+Interactive#{"compari...](http://finance.yahoo.com/echarts?s=MCD+Interactive#{"comparisons":"^GSPC","comparisonsColors":"#cc0000","comparisonsWidths":"1","comparisonsGhosting":"0","range":"5y"})

~~~
jplewicke
That chart understates the cumulative return of McDonalds by 20%, since it is
just a graph of price appreciation and does not include the effect of
reinvesting dividends. The proper cumulative return for McDonalds over that
time period is actually 64.7%, assuming reinvestment of dividends.

~~~
kolbe
MCD only has a slightly higher dividend yield than SPY. His graph doesn't
misrepresent MCD's relative performance.

------
emodendroket
Do they? I mean, let's say they changed absolutely nothing. They would not
likely go out of business.

------
narrator
The best thing Mcdonalds could do is to simplify their ingredient lists such
that anyone could read them and see that they were composed of boring obvious
ingredients. For example, if their fries contained just potatoes, salt and
some cooking oil that wasn't canola or cottonseed oil and they advertised it,
I'd buy them again. If they wanted to be revolutionary, they could go for
certified non-gmo. The world needs boring simple obvious cheap food. People
are sick of all the questionable food additive innovation of the last few
decades.

~~~
cowsandmilk
McDonalds Ingredients for a hamburger:

Hamburger: 100% BEEF PATTY, REGULAR BUN, KETCHUP, MUSTARD, PICKLE SLICES,
ONIONS

That list seems pretty simple. I'm still not going to McDonald's to buy a
hamburger. Maybe you object to what makes up the ketchup, mustard, etc?

Source:
[http://nutrition.mcdonalds.com/usnutritionexchange/ingredien...](http://nutrition.mcdonalds.com/usnutritionexchange/ingredientslist.pdf)

~~~
deepvibrations
Err, yeah..but lets take the 'regular bun' for example- in that you have:

Ingredients: Enriched Flour (Bleached Wheat Flour, Malted Barley Flour,
Niacin, Reduced Iron, Thiamin Mononitrate, Riboflavin, Folic Acid), Water,
High Fructose Corn Syrup and/or Sugar, Yeast, Soybean Oil and/or Canola Oil,
Contains 2% or Less: Salt, Wheat Gluten, Calcium Sulfate, Calcium Carbonate,
Ammonium Sulfate, Ammonium Chloride, Dough Conditioners (May Contain One or
More of: Sodium Stearoyl Lactylate, DATEM, Ascorbic Acid, Azodicarbonamide,
Mono and Diglycerides, Ethoxylated Monoglycerides, Monocalcium Phosphate,
Enzymes, Guar Gum, Calcium Peroxide), Sorbic Acid (Preservative), Calcium
Propionate and/or Sodium Propionate (Preservatives), Soy Lecithin, Sesame
Seed.

Looking at that, I think narrator has a good point!

~~~
kidsthesedays
Unless you make your bread from scratch this is what supermarket bread is like
too.

~~~
rmxt
I don't mean to fear-monger, but at least I can read and mentally visualize
all of the ingredients in some supermarket breads. See here:
[http://www.womenandweight.com/wp-
content/uploads/2011/12/pep...](http://www.womenandweight.com/wp-
content/uploads/2011/12/pepperidgefarm2.jpg)

I don't know what any of these are: Ammonium Sulfate, Ammonium Chloride, Dough
Conditioners (May Contain One or More of: Sodium Stearoyl Lactylate, DATEM,
Ascorbic Acid, Azodicarbonamide, Mono and Diglycerides, Ethoxylated
Monoglycerides, Monocalcium Phosphate, Enzymes, Guar Gum, Calcium Peroxide),
Sorbic Acid (Preservative), Calcium Propionate and/or Sodium Propionate
(Preservatives)

Please note, I'm not trying to go all "dihydrogen monoxide" here, because I do
know and understand that modern food, and as a result modern global health,
processes rely on chemicals with names like the above ingredients.

Also, maybe more viscerally, I'd wager that the McDonald's bun is one of those
food items that has an unrefrigerated shelf life approaching infinity. (/s?).
To think that something that even bacteria and molds won't be able to eat and
break down is going to enter my body as sustenance...that's a little
unsettling. At least with the supermarket bread I've posted, it probably won't
last more than a week or two on the kitchen counter. In my uneducated opinion,
that probably means that things like that won't linger around in my body too
long to cause any lasting impacts, good or bad.

~~~
joezydeco
No, they go moldy too. I've seen it happen.

Now let's see what's in the bread at Panera, or the bun at Five Guys or Shake
Shack, or the tortilla at Chipotle. If you're expecting artisan bread baked
early that morning by a master chef, you're going to be sorely disappointed.

Here's Chipotle's large tortilla ingredients:

 _Flour, Water, Organic Whole Wheat Flour, Non-GMO Canola Oil, Salt, Non-GMO
Baking Soda (Sodium Acid Pyrophosphate, Baking Soda, Monocalcium Phosphate),
Wheat Bran, Fumaric Acid , Calcium Propionate , Sorbic Acid , Sodium
Metabisulfite._

And how about the ciabatta bread that Panera uses in their sandwiches?

 _Unbleached enriched wheat flour (flour, malted barley flour, niacin, reduced
iron, thiamine mononitrate, riboflavin, folic acid), water, country base
(natural wheat sour, salt, rye flour, wheat gluten, malted barley flour,
sunflower lecithin, ascorbic acid, enzymes), olive oil blend (extra virgin
olive oil, canola oil), natural base (calcium diphosphate, malted barley
flour, dextrose, distilled monoglycerides, rye flour, sunflower lecithin,
wheat flour, enzymes, ascorbic acid), yeast (yeast, sorbitan monostearate,
ascorbic acid)_

Five Guys is, um, pretty open too. I wonder what the "secondary" ingredients
are:

 _Our bread is a proprietary recipe. The primary ingredients are: Water, Salt,
Sugar, Vegetable Shorting (Contains: Soy), Milk, Eggs, Bleached Bread Flour,
Yeast, Sesame Seeds_

~~~
rmxt
I agree... I don't think that other chains necessarily make more "natural"
food than McDonalds and I wasn't really trying to draw out that comparison.
I'm not a paleo/organic advocate by any means. "Country base" and "natural
base" are euphemisms if I've heard them. Those places _do_ have a better
marketing tact though.

Just stumbled across this response from McDonald's themselves... maybe it's
less about preservatives and more about dry and salty food (a la beef jerky)
[http://www.mcdonalds.com/us/en/your_questions/our_food/why-d...](http://www.mcdonalds.com/us/en/your_questions/our_food/why-
doesnt-your-food-rot.html)

~~~
joezydeco
But if you scan this entire thread as it grows (like the previous 6
"McDonald's is in trouble" threads on HN over the past year), you'll see that
mantra repeated over and over. The food is shit. The upscale food is better.

It's an image McDonald's knows they need to combat and their newest ad
campaigns are already working on that angle.

I'm not defending MCD by any stretch of the imagination. But it's amazing how
the food was just fine when the economy was in the shitter and people got by
on $1 McDoubles. Now that things are turning around and wages are
microscopically better, suddenly everyone's a foodie and that $11 2000-calorie
Chipotle lunch is a feel-good while the McDouble is dog food.

The cycle will repeat.

