Shrinking the asset base by converting company stores to franchises (2007)

The line between “reform” and “asset disposal”

The change Harada’s decade brought had two faces. One was a restructuring of the business — lightening a heavy, directly-operated base by handing operations to franchisees and squeezing headquarters’ investment and payroll. The other was asset disposal: selling the company stores themselves to book a profit. The former is reform to keep the business going; the latter is a one-time gain that runs out. The problem is that the two dissolved into the same single line of operating profit, hard to tell apart from outside. As long as earnings kept rising, the true strength of the core business and the gains from selling assets were read together as one healthy number.

Asset disposal was not in itself a mistake. There was reason in lightening the heavy directly-operated base, and franchising was a policy common to McDonald’s worldwide. What is in question is that the sale gains masked the core’s earning power and hid a delay in the turnaround. When the stores left to sell ran out in 2013 and profit dropped sharply, and the next year’s chicken scandal tipped it into loss, the hidden weakness of the core came out all at once. When accounting expression blurs the line between reform and asset disposal, investors and managers alike misjudge the true strength of the business. Harada’s decade carved that danger into one company’s results.