Profile: Brian Mullens, MacDonald's UK finance director

Brian Mullens, McDonald’s UK finance director

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 every McDonald’s you have ever been 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.

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 and 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.)

These things matter to Mullens, and not just because, as he says, a
re-imaging typically results in a 5% to 6% uplift in sales.

McMakeover

Mullins 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.

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.

Man of Lettuce

His role also includes supply chain, which 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.

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
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.’

Off the leash

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.

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 lease.

‘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
makes a suitable match with the property strategy.

Any interest in financial engineering such as sale-and-leaseback deals? ‘No,’
is his simple answer. ‘There are benefits in keeping it simple. The corporation
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.’

In fact, the plan is to hand back between $15bn and $17bn 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?

‘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.

Andrew Sawers is the editor of our sister publication
Financial
Director, where this article first appeared in the April issue