McDonald’s Has to Do More Than Manipulate Its Stock Price | Hacker News Reader

McDonald’s Has to Do More Than Manipulate Its Stock Price

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27 pointsriqbal49 comments

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.

But with share buy backs the advisers make bank unlike dividends where its the owners that directly benefit

Depends on the tax status of the owners, since dividends and cap gains are not treated in the same way.

But share buy backs are not a guaranteed gain and you don't have to spend millions to an IB to do the buy back.

As someone said (back in the 20's) where are the investors yachts :-)

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 [2] http://thinkprogress.org/economy/2013/08/22/2509161/mcdonald... [3] http://democrats.edworkforce.house.gov/sites/democrats.edwor...

I hear you. I'd love you to break up the argument so others can. I had to read it 3 times to get the core argument. No criticism or lecture, just feedback:

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McDs provide monetary return to their investors (complexities of share buy-back or dividend are tax and administration issues aside from the key issue)

Executives and many investors focus on short-term goals. If they are focusing on short term goals linked to stock they are motivated to extract capital (I do not say value, your premise is that capital needs to be reinvested, and is not surplus), not build capital.

Whether to extract capital via stock actions could be interestingly compared to "What if they raised capital via fixed income [bank loan, bonds] instead of stock. Would they have the same pressure? My answer would be "Hell yes, but they'd probably planned in advance that this repayment of investment was carefully done, and choosing to use stock to raise capital meant the outcome was a lot more uncertain, or they viewed stock as lush/easy pickings compared to a more sane bank loan." - Could go into that more.

(Dis-)meeting of arguments (pro and against, not you and me)

So you're saying an extraction of capital is an extraction of value, as there's an opportunity cost of the capital for the investors vs return on capital for the company, but the extractors of capital may have a conflict of interest for doing so.

McDs management action say there isn't [a conflict of interest], because they can do it and are backed by shareholders [who may also be under a conflict of long term interest] and capital is better extracted (under short term goals) rather than re-invested.

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Reinvestment:

Above minimum wage seems broadly independent of the above, and is an argument of retention of people creating value,; does retaining capital lead to improving human of capital or not? Or are there other options?

Retaining capital can imply a lot of things. Releasing it means nothing viable is better than what the investors can find. But define this better. Break down the logical arguments into what they are then approach from an fact-based basis.

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I just wanted to break your argument down into pieces, sorry for being so discursive, it just seemed like lots of directions be being stabbed at, at the same time, and I like your story, it just wasn't that clear.

> 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.

> ...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 [2] http://en.wikipedia.org/wiki/Minimum_wage_law#Australia

I guess the point is that if McDonald's has so much excess revenue that they can afford to buy back shares, then that's strong evidence that they aren't paying their workers enough. Investing in their workforce would likely reap benefits in terms of customer satisfaction, as attempting to order from bored, distracted workers who will inevitably get your order wrong in a dirty establishment probably contributes just as much to falling sales as the quality of the food. Combine that with the huge costs to taxpayers of distributing excess cash as barely-taxed capital gains rather than high-multiplier income, along with the costs of providing food stamps and other income assistance to full-time workers who live below the poverty line, and stock buybacks of this sort represent a massive net wealth transfer from employees and middle-class taxpayers to generally already-wealthy stockholders.

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?

>and the company has some cash lying around

Does your opinion change if they're taking on debt / shrinking their business to buyback shares?

>The company’s executives said that to help finance the plan, McDonald’s would increase refranchising (turning company-owned restaurants into franchises), take on more debt (even at the risk of lowering its bond rating), and find $300 million to cut in general and administrative expenses.

It doesn't sound like its a case of McDonalds having a pile of cash

Maybe let's put it a different way: if you and I are partners in a business, and I decide to take out a second mortgage and buy you out, is that a bad thing? What if I have to sell a slice of the business to pay off that mortgage? I dunno, this all seems reasonable, and if it's reasonable for one person, then I think it's reasonable for a corporation.

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.

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.

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.

Actually McDonald's is not doing that. They're food sales has been suffering the last several years and the article is all about the other means they've been using to expand their market cap and "increase shareholder value". It's not dire straights, yet, but they have been losing market share consistently and this specific industry is constantly under threat from upstarts like the ones you mentioned.

I can give my anecdotal position that this isn't the case in Australia. McDonald's is steadily increasing their prices and still completely dominating the fast food industry, more and more every year. At any time of the day there is at least a five to ten car queue at my local store, and they have effectively forced Hungry Jacks (Burger King) into -- more or less -- giving their food away for free.

I noticed that about Japan as well, there was a line out the door for McDonald's when I was in Osaka a few years ago.

Part of the difference is experience: your typical American major-city McDonald's is ill-maintained and staffed by unpleasant people, the food being terribad is just the icing on the shitcake and given how few fucks seem to be given about service quality or cleanliness, the chances it'll give you salmonella are probably much higher. Quite different from the magical wonderland where hamburgers grow on trees we were sold on by the 1980s television commercials.

In Japan, cute 20-something girls take your order and serve your food with a little Handi-Wipe to clean up with after you're done. The restaurant is spotless and though a Japanese Big Mac tastes identical to an American Big Mac, you don't feel like it will give you food poisoning. From my limited experience with Australian McD's it's much the same and they turn into trendy little hangout spots.

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

And consequently that implies people believe the expectations of Wall Street are wrong, or at least not in line with what the majority of people believe is right. I think that's probably true.

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...

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.

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

> as evidenced by the recent strong performance of the stock price

Any "strong performance" may only be a result of the stock buyback -- which serves to inflate share prices by creating demand for the stock not by virtue of the value of the business, but by promising to extract further value from the business and give it to stock holders via dividends and buybacks. Quoting the article:

>"...its executives can do up to $8.1 billion in buybacks in 2015..." and "...to help finance the plan...[McDonald's would] take on more debt..."

As noted in the article, they paid out 134% of net income in 2014 -- so it's probably not the strength of the business that's driving demand.

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

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.

Whats wrong with GMO Potatoes/Fries?

There is a fear around anything GMO. Regardless of the actual health effects, it acts as a selling point in the same way 'organic' does.

Reason 1:

1. Company creates GMO.

2. Company visit farmers and make them offer.

3. Farmer don't want to buy for whatever reason.

4. Company buys land near farmer, plant GMO and wait for bees to transfer genes to farmer

5. Company sue farmer for copyright infringement.

6. Farmer cannot afford lawyers, went bankrupt.

7. Company offer to drop the case if farmer buys their GMO.

8. Farmer eventually lost the land, company buys it, plant their GMO.

Reason 2:

1. Company want to improve plant, they have 2 choices:

a) make it more resistant to pest

b) make it more resistant to pesticide

2. Company chose b), then (allow farmers to) dump copious amount of pesticides on crop killing everything nearby.

3. Poisonous monoculture crop, bees are starving.

Reason 1 is a legal issue in the US, this is not something i've ever seen happening in Europe.

Reason 2 sounds possible, but a bad decision of the Farmer. Once again not a thing i've heard happening in Europe, because it simply isn't cost efficient to do so.

But what we certainly have is Organic Farmers having to resort to copious amounts of less effective but "organic" pesticides.

Reason 1 also happens in Canada .

Never happened.

What's wrong with canola oil?

Also, you're kind of missing the point that skinny fries without potato skin are low on the list of healthy ways to eat a potato.

Canola contains small amounts of eurcic acid, which is bad for heart health and 80% of it is gmo and thus treated with tons of glyphosphate before harvest. Glyphosphate is classified as a possible carcinogen by the world health organization. Gmo varieties are engineered to resist glyphosphate so the farmer can apply more of it.

> Glyphosphate is classified as a possible carcinogen by the world health organization.

So's coffee.

Meanwhile, sunlight and estrogen are known carcinogens, but we don't hide in dark caves and cut out ovaries.

http://en.wikipedia.org/wiki/Erucic_acid indicates "the dietary intake of erucic acid by an individual consuming at the average level is well below the PTDI, therefore, there is no cause for concern in terms of public health and safety".

This is the sort of scientific illiteracy that lets people like Food Babe scaremonger over what's in a pumpkin spice latte.

GMOs are resistant to glyphosate so the farmer can apply less of it, but do so earlier in the crop cycle.

Glyphosate got a 2A rating from the IARC. That's a rating that has importance for people working with the chemicals - it's an industrial exposure rating relevant to people who spray their crops. It has no relevance to you as a consumer of canola oil. The dose of glyphosate you'd get from canola oil is tiny.

Do you have a credible source for your eurcic acid claim?

Canola oil contains by definition less than 2% its total fatty acids as erucic acid. We think harm occurs in the 750 mg per kg range. (So an average adult weighing 60 kg needs to eat 45 gr of erucic acid per day, and erucic acid is just 2% of canola oil so you'd have to eat 2 kg of canola oil per day to get that much erucic acid) We adjust that down by a factor of one hundred just because, so a safe daily dose is 7.5 mg. that means a person has to eat 375 mg of canola oil per day to reach this dose which is a hundred times smaller than the smallest dose we see harm in animal experiments - and for this small dose you need to use infant pigs, otherwise the risky dose is higher.

By European law the amount of erucic acid must be less than 5%. US FDA rules say that canola oil must be less than 2% Erucic acid.

McDonalds doesn't sell GMO potatoes.

http://www.idahostatesman.com/2014/11/15/3487642_mcdonalds-r...

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...

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!

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

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...

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.

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

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...

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.

> 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.

Do you eat salt? Dried pasta? Rice? Honey? None of these things really go off, either.

http://aht.seriouseats.com/archives/2010/11/the-burger-lab-r...

> It means that there's nothing that strange about a McDonald's burger not rotting. Any burger of the same shape will act the same way. The real question is, why?

TL;DR: moisture content is the issue. If you get a thin, dry piece of supermarket bread it'll sit there forever too.

Well I think this depends. I think most people who avoid McDonalds are the kind of people who also read the ingredients of the products they buy, so they would choose a bread with much fewer preservatives etc. The in-store bakery bread also has fewer ingredients by a long way. Eg. Tesco white rolls: Wheat Flour (Wheat Flour, Calcium Carbonate, Iron, Niacin, Thiamin), Water, Yeast, Salt, Wheat Gluten, Emulsifier (Mono- and Di-Acetyltartaric Esters of Mono- and Di-Glycerides of Fatty Acids), Flour Treatment Agent (Ascorbic Acid) (at least that list is reasonable so I can look them all up!)

The supermarket "bakery" is such a scam - what they do can hardly be considered "baking."

There have been problems with the 100% beef patty though. Occasionally you'll take a bite and bite into something hard. I've always assumed this is a piece of bone that somehow made it into the patty. This does not happen at other burger places and it makes me wonder what parts of the cow really make it into this beef patty.

http://usnews.nbcnews.com/_news/2012/01/31/10282876-mcdonald...

>If they wanted to be revolutionary, they could go for certified non-gmo

You meant anti-science, right?

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