As CFO of McDonald’s UK and Northern Europe operations, Paul Pomroy has a broad suite of responsibilities, with around £1 billion total annual spend at his disposal for company-owned and franchisee operations. Treasury needs to not only ensure the corporate function has the necessary funding, but also that all its franchisees can afford to get on board immediately with new initiatives.
Chief Financial Officer
Promoted in November 2012 to CFO of the UK and northern Europe division, Paul Pomroy, a 16-year veteran of McDonald’s, has the kind of breadth and depth of experience that entirely warrants his ascent to a leading financial role for this globally recognised brand.
McDonald’s needs little in the way of introduction; it is simply one of the world’s largest and most recognisable fast food brands. In the midst of global economic meltdown, it has still managed to drive a 2% gain on full-year revenues for 2012, hitting $27.6 billion. Since 2006 it has adhered to its high-level strategic ‘Plan to Win’, in which it defines the continual optimisation of various operational aspects of its business. The ‘Plan to Win’ for 2013 will see McDonald’s invest some $3.2 billion worldwide in new restaurants and its continued ‘re-imaging’ programme, in which it delivers new signage, new eco-friendly and health-conscious food and drink products, and even free wi-fi to existing restaurants. The corporation’s financial team is under no illusion that its position is unassailable: according to the 2012 annual statement, it fully expects global bottom-line growth to remain “pressured”.
Having qualified as an accountant in summer 1996, Pomroy “jumped ship” towards the end of that year, joining the McDonald’s crew. He proceeded to progress up through the ranks of finance, but notably spent the period between late 2002 and mid-2005 in the business strategy department, alongside marketing and food development. Armed with first-hand knowledge of how the business works, promotion to the UK executive team in February 2008 saw Pomroy assume the role of Financial Vice President. Here he took responsibility for commercial and corporate finance, including tax and treasury, with his remit extending to pricing, profitability and financial projections.
Following the move of long-term Finance Director, Brian Mullens, to McDonald’s Oak Brook, Illinois head office, Pomroy took the helm of the company’s north London-based regional HQ, assuming the title of CFO, a role that gave him the additional remit of supply chain and real estate management. This broader sweep of responsibilities puts at his disposal a total annual spend for company-owned and franchisee operations of around £1 billion (about £700m on supply-chain and up to £300m on capital spend).
Despite the high-power position and the constant cut and thrust of business life, “what really keeps me at McDonald’s is the people,” states Pomroy. It is, and always has been, a melting pot of individuals from all walks; from the crew in the dining area to the senior executives, to the equally diverse mix of franchisees (a smattering of ex-bankers and accountants amongst their number).
Taking it to the streets
The franchise model is a big part of the UK operation, making up around 70% of the business. It brings with it some interesting challenges for a finance department. The best way to describe it to those who have not worked in this environment is to liken it to giving your shareholders a permanent hot line to your desk, says Pomroy. “They have a vested interested in the business because they have a 20-year contract with us for each restaurant that they run, with their own equity invested, and they are very heavily involved in the planning process and working with us to move the business forward.”
The franchisees are represented through a leadership team which has direct access to McDonald’s senior executives with a remit to discuss any major issues that affect the running of their businesses. Such a close partnership can indeed be challenging in terms of “getting everyone on the same page”, but McDonald’s would not have it any other way because the franchisees are close to their customers. “On a day-to-day basis, we have 170 franchisees that can give us instant feedback from the high streets on how customers are feeling and reacting,” explains Pomroy. Their input helps the whole business to constantly move forward which, he says, is one of the reasons why McDonald’s has survived the worst of the recession. His work with the franchisees also gives Pomroy the opportunity to step back from international corporation issues, enabling him to remain grounded; a new one-restaurant business may have a different set of concerns but these must nonetheless be met with equal professionalism.
Cash is king
McDonald’s is not an overly complex business and it still uses spreadsheets to manage its cash position. The oft-quoted commercial notion that ‘cash is king’ is certainly well-founded here. Around 70% of its takings are in cash, the rest is by card, with contactless payments (enabled in all restaurants) gathering momentum. Handling the volume has never been an issue and the typical till-to-bank delay is no more than three days. Treasury is connected to each of its UK banks (RBS, NatWest, Barclays and HSBC) electronically, using bank proprietary platforms. Most payments out are made using electronic data interchange (EDI) and there is an electronic invoicing (e-invoicing) system in place too.
When it comes to those outgoing payments, even with a number of overseas suppliers, only around 10% of McDonald’s UK’s transactions involve foreign currency (and then only in euro or US dollar). The reason is simple: it does not buy any of its produce; suppliers purchase raw product and sell the finished article to McDonald’s.
Because major suppliers are taking the initial procurement risk, it is absolutely in the interests of supply chain continuity that each one makes the best investment decisions. In terms of hedging policy, McDonald’s treasury will work with all of them to help them formulate (but not impose) best practice. This may not necessarily see them take the cheapest route as the over-arching aim is to deliver cost-certainty for McDonald’s, something that is particularly important for the franchisees. In this respect, suppliers can hedge currency with consultation between treasury and supply chain. As part of the supplier and McDonald’s relationship, Pomroy chairs a quarterly phone-in for them in which the US and UK treasury teams, alongside economists from Barclays and RBS, discuss currency movements.
The nature of McDonald’s business means it does not have the same financial challenges faced by companies selling on credit. This means it can pass on the benefits of its cash flow with supplier payments typically executed in less than 30 days and many of the main contractors being paid weekly. “If we sit on a lot of cash, we won’t earn much interest on a weekly basis, but to our suppliers that cash is really valuable,” comments Pomroy. But even when yields were higher, the same approach applied: the quicker McDonald’s passes the cash down through the supply chain system, the more assured that supply chain is. Without that assurance, none of the businesses can function effectively – it is that simple.
All pull together
Although the global corporate business is guided by headquarters, with “a very strong treasury function in the US”, it is not centrally-ruled, instead following the cues of each local market to form corporate policy. “We all learn from each other, and Oak Brook pulls the best of what is going on around the world and shares that with all of us,” states Pomroy.
It’s a big part of treasury’s job in the UK not only to make sure the corporate function has the necessary funding, but also that all its franchisees can afford to get on board immediately with new initiatives. There are no half-measures where consistency of the McDonald’s experience is concerned. If a capital-intensive initiative is proposed requiring these businesses to have funding, the treasury team will already have been talking to the banks to ensure they have it.
The concerted effort of McDonald’s to revamp its branding across both UK company-owned and franchised businesses is a lesson learnt from a rather testing period up to about 2005, when it had focused too heavily on new openings and not enough on brand consistency. Following a period of introspection, the planning process that now involves franchisees and the senior executives (and a lot of real-world experience) saw a change of tack.
Under the banner of the ‘Plan to Win’, the heading was re-set in 2006, casting off with a £300m total re-imaging programme. The new strategic direction may have coincided more or less with the onset of financial crisis, but it has yielded notable results. The process, based on a 12-month cycle of constant renewal, has seen 96% of the UK chain upgraded, bringing with it brand and experience consistency and a number of new products and incentives for customers. This has kept trade “solid” throughout the worst of the recession. Indeed, says Pomroy, over the past five years, the UK business has seen its most successful period ever, growing like-for-like sales every year.
No treasury island
McDonald’s treasury manages a cash pooling structure within its global wholly owned subsidiaries. This allows the US central treasury team to manage the corporation’s liquidity and associated counterparty risks and facilitate inter-company loans. When it is required, debt is typically longer term (and currently rated A2 by Moody’s and A by S&P), and is only issued by the US office.
As McDonald’s is cash rich, typically about a third of funds is used to pay down debt, another third goes on re-imaging and development and the remainder is returned to shareholders. This is not set in stone and in early 2009, in response to the financial crisis, the brakes were gently applied to the pooling process in the UK to give the cash management processes of its banks some stability.
“We approach our banks in a slightly different way than most other retail businesses,” says Pomroy. By treating them the same as any of its suppliers, McDonald’s has created a “three legged stool” model in which the company, the franchisees and the suppliers all have to be equal to ensure stability. This means all have to be fully involved and working together.
The listening banks
With the view that its banks are its partners, banking representatives join with auditors, franchisees, major suppliers and the senior executive team (including US treasury) at the AGM where plans for the coming year are unveiled. The finance team also meets on a quarterly basis with the banks to discuss how those plans are progressing. “It’s a unique situation having competing banks sitting around the boardroom table,” notes Pomroy. He is obviously aware that they also finance McDonald’s direct competition, but he is insistent that there has to be trust and openness between all partners. “Our banks don’t have any surprises; they know our strategy, they know the tactical execution and when it’s going to happen. We also have some significant planning tools for the franchisees with which the banks are very familiar.”
McDonald’s corporation has a revolving credit facility with global banks and works with them on placing corporate debt. But the level of corporate business is only given on the understanding that the bank also works with the franchisees. “We don’t allow them to cherry-pick; if a bank in the UK wants to take the corporate debt they can pitch for it, but they also have to pitch for the business of our one-store operators.”
Whilst corporate McDonald’s remains at arms length in the financial relationship between bank and franchisee – it doesn’t underwrite any debts for example – through its deliberate sharing of planning information with all parties, it really can build up that solid level of trust, explains Pomroy. “We have a good track record of doing what we say we are going to do and the franchisees have a very healthy appetite to paying down their debt in the UK and we embrace our banks as partners in the business.”
Keeping up to scratch
Armed as they may be with as much information as they could possibly need to do the job properly, there is no room for complacency amongst the banking panel. As with all of McDonald’s suppliers, performance review is ongoing, with a well-established set of key performance indicators (KPIs) covering all aspects of the business, banks included. “We fill in an annual report on each bank, meeting with the relationship directors in the UK before the report is submitted to Oak Brook,” says Pomroy. If there are any concerns US treasury will meet with senior representatives from each institution to iron out the issues. This has only happened twice in the past six years.
“It comes down to relationships,” Pomroy says of the success to date. Franchisees need access to affordable credit so they can get on with running the business and the bank-as-partner arrangement helps. Pre-crisis, the funding process could take as little as 24 hours, but in the current climate franchisees can typically get an agreement in around seven to ten days, which is still relatively favourable – and there have been no credit refusals for franchisees in the past few years. “I think our relationship with our banks has actually got stronger during the recession,” states Pomroy.
Crisis? What crisis?
In his role as CFO, much of Pomroy’s work is in deciphering the multitude of views on what may or may not happen espoused by the world’s economists. But he feels it is also important in the current climate to be able to understand his suppliers’ businesses (banks included) sufficiently well to be able to empathise with the conditions they are facing – and to know when they may be pushing it too far.
That level of understanding must extend to the McDonald’s customer base too. The last quarter of 2012 was a tough time for all retailers in the UK. “We must stay close to our core customers and always understand how they are feeling,” he says. “As the austerity measures reach further, we need to ensure that we keep changing the experience to meet their expectations.”
McDonald’s is fortunate in that it has got itself into a place where it need not worry about next week’s cash position. But Pomroy knows it has to keep working hard to stay ahead of the game. The austerity measures that are clearly hitting many other retailers have not affected the number of franchisees coming forward. “We’ve actually seen an up-tick,” he reports, adding that communication of the message concerning supply chain and financial support, amongst other aspects, has given potential franchisees confidence to take on this long-term partnership. With the four main lending banks attending presentation days, this is surely one place where they are willingly supporting the smaller enterprise.
Armed with experience
Having risen up through the finance ranks, Pomroy is thankful for his experience in the business strategy department which, by bringing him up close and personal with the various allied functions, he gained a wealth of experience that is now serving him well as CFO. Armed with a level of general business knowledge and empathy that some finance professionals lack, the first six months of his new role have seen him immersed in supply chain and real estate matters, getting out and about, meeting suppliers and franchisees and promoting new initiatives. All the while, of course, he has been working on the ‘Plan to Win’ for 2014 and finding new ways of serving the constantly shifting needs of McDonald’s customers.