By Neil Saunders
Although revenue growth has softened over the past year, this quarter’s results still represent a good outcome for McDonald’s. They suggest the fast-food giant continues to gain ground in the U.S. and beyond. They also signal that, as the company laps tougher-prior year comparatives, it is still capable of delivering growth. While global revenue is down by almost 12%, this is largely a function of McDonald’s transferring company-owned restaurants into franchises.
McDonald’s is attracting a wider mix of customers, largely in the U.S. due to restaurant refurbishments that are changing perceptions, especially among older consumers. New menuboards are compelling and enable daypart strategies.
Part of McDonald’s success comes from the fact it is attracting a wider mix of customers into its restaurants. In the U.S., this is, in large part, a consequence of the modernization program the company has been undertaking. With around 1,000 restaurants being refurbished each quarter, there has been a positive step change in customer perception, especially among older consumers. This has been cemented by initiatives to improve quality, such as the use of fresh rather than frozen beef. As a result, McDonald’s is now a concept that more diners are prepared to visit and to linger in.
In newer stores, digital menuboards have allowed McDonald’s to display more of its range in a compelling way. They also allow it to respond quickly to different dayparts and promotions and trends. The same goes for the digital app, which has increased engagement with the brand. We are particularly encouraged by promotional initiatives designed to increase app use, such as the free fries on Fridays deal.
While the cosmetic changes made to restaurants are vital in driving sales, operational enhancements are also improving efficiency. Newly designed kitchens, for example, are faster, have more capacity, and allow for more flexibility in creating custom options. Not only does this help protect margins, it also improves service time at the counter and drive-thru windows which has a positive impact on service perceptions.
A further area of growth in the U.S. is the delivery service, which McDonald’s has been rolling out with Uber Eats. From data we have seen, this initiative has been a success. Firstly, around 68% of sales are incremental. Secondly, the core demographic is mostly younger—around college age—and are new McDonald’s customers. And thirdly, orders tend to come outside of peak store hours. These dynamics make the service extremely valuable in terms of growth. McDonald’s has much more runway to roll this initiative out to more restaurants and market the service more heavily.
We remain supportive of McDonald’s initiatives to streamline processes in store, including the use of automated ordering. As the labor market tightens and wages inflate, such initiatives will become increasingly necessary to keep staffing costs under control. Compared to many rivals, McDonald’s is in an advanced position in using technology to reduce costs.
Looking ahead, McDonald’s will come up against some tough prior-year comparatives, so growth may continue to soften. However, as long as menu innovation continues, we believe the chain will continue to be a winner in the fast-food space.
Neil Saunders is managing director of research firm GlobalData Retail.