By Neil Saunders
Although various storms and natural disasters across the U.S. threatened to blow McDonald’s off course, the company’s third-quarter numbers are a testament to both its resilience and the soundness of its reinvention strategy.
Refurbished locations project a modern image and help attract new diners, especially family segments and younger age groups. Better displays of products have also boosted sales.
Although international growth has waned slightly in lead markets, U.S. comparable sales growth continues to accelerate with a 4.1% increase over the same period last year. Given that the fast food and casual dining segments as a whole struggled over the third quarter, this is an encouraging set of results which suggests McDonald’s is gaining both market and customer share.
Promotional activity has been key to McDonald’s success within the U.S., with the cold beverage promotion, the recent McCafé offer, and the McPick 2 deals pulling in customers. While such activity is not new and helped to drive trade during the second quarter, we are encouraged that it still has resonance given the recent increase in the number of offers and deals from fast food rivals.
Pleasingly, a focus on value for money did not erode margins, mainly thanks to cost savings initiatives and an increase in the sale of higher margin products. As a result, regional operating income for the quarter increased by a respectable 6%.
If McDonald’s success were solely reliant on a value play, we would harbor some concerns about its long-term sustainability. However, our data show that the company is also successfully driving sales of more premium products and drawing in new diners who are attracted by items like its Signature Crafted sandwiches.
Improvements to restaurants are also helping to shift perceptions of McDonald’s. Refurbished locations project a modern image and are also spaces that help attract new diners, especially family segments and younger age groups. Better displays of products like snacks and treats have also boosted sales in categories where McDonald’s has traditionally been lackluster.
Although the modernization program has further to run, we are encouraged that McDonald’s projects most of its freestanding restaurants will have been enhanced by the end of 2020. This, in our view, will provide a continued uplift to sales over the next few years. Moreover, changes to restaurant processes, which includes the introduction of more kiosks and the rollout of mobile ordering and pay, will help to improve operational efficiencies.
Away from physical formats, we are encouraged that McDonald’s is rolling initiatives to generate incremental sales. These include the expansion of the McDelivery program with UberEATS to 13 countries, including 3,500 restaurants in the US. The expansion of McCafé’s retail presence with the launch of ready-to-drink McCafé Frappé beverages is another strategy that will aid sales outside of restaurants and gives McDonald’s more of a presence in the lucrative retail coffee market.
Overall, McDonald’s is proving that despite its already high market share and the sluggishness of the sector, it remains a fast food player that is firmly on the front foot.
Neil Saunders is managing director of GlobalData Retail.