As consumers in today’s market continue to struggle with the harsh economic reality, many businesses are cutting capital expenditures to grow their bottom line. Trends show that net capital spending is down across the board over the last year, and that brands don’t intend to make any drastic changes anytime soon. At the helm of the trend is McDonald’s Corp., which announced a $100 million cut that will remain in effect at midyear. Still, the company will spend approximately $3 billion to expand and renovate restaurants, but the note of caution is ever-present.
According to Chief Financial Officer Peter Bensen, “This is a conscious decision to delay a limited number of new openings into 2014 based on current conditions.” And McDonald’s isn’t alone. Major companies including Verizon Communications Inc. and Honeywell International Inc. are feeling the pinch of today’s economic climate. Slow growth and lower consumer spending are dampening what was once seen as a robust economic recovery.
Fueling these capital expenditure cuts is the Affordable Care Act, which McDonald’s estimates will increase its expenses by $400 million annually. This breaks down to approximately $10,000-$30,000 per individual restaurant. The exact impact remains to be seen as the Act is implemented and numerous variables determine actual costs. While cutting expenditures is a primary strategy that McDonald’s is embracing, the company is still mitigating the loss through higher menu prices.
Weak corporate and government spending has prompted CFOs to take a more conservative approach. Because the market is so volatile and uncertain, conservative planning negates potential risks and ensures that the company can respond quickly to change. Still, McDonald’s has experienced impressive sales:
- Third-quarter estimates disappointed some analysts, but were still better than initially predicted. This showcases the growth that the company has seen from consumers after strategic shifts.
- Profit is up $1.52 billion from $1.46 billion at this point last year. Globally, the growth rate stands at 0.9 percent.
- The cost per restaurant for the Affordable Care Act will likely be lower than original forecasts, alleviating internal concerns about the financial impact of the law.
As McDonald’s continues to pursue a more conservative strategy, many CFOs across the country are following suit. How is your company faring?