By Neil Saunders
McDonald’s has produced a reasonable set of results with solid gains on the sales line, especially from the US and lead international markets, which were both up against tough comparatives from last year. However, the modest slowdown in growth is still present. This, along with the 6.7% decline in operating income, suggests that McDonald’s is having to work harder for slimmer rewards. This does not sit well with the increasing complexity and higher levels of capital expenditure the company is introducing into the business.
Within the US, the pressure is particularly acute and is resulting in more disgruntlement and frustration among franchisees. The central problem is that cost growth is being outpaced by sales growth and returns are diminishing. Some of these pressures, such as wage hikes, are largely outside of McDonald’s control. Other aspects such as restaurant refurbishment and menu changes are within its remit. The strategy McDonald’s is pursuing is not wrong, but it needs to explain and sell it better to the owners of its franchises. Management understands some of the issues—hence its action to slow the pace of restaurant refurbishments, where franchisees bear some of the costs.
One encouraging development in the US is the increase in average check during the quarter. This is largely because premium items have been pushed and the dependence on the dollar menu has been reduced. However, this has also led to some franchisees to complain about increased menu complexity and to take the view that their offerings are becoming more like those of fast-casual dining outlets.
As much as some franchisees may complain, it is necessary for McDonald’s to drive trade at higher price points rather than being reliant on its value menu for growth. But there is a distinction between producing a solid premium product and introducing too many customization options as a proxy for quality. McDonald’s needs to emulate In-N-Out by having a simpler, but highly regarded range of options as part of its menu.
With costs still an issue, restaurant efficiency is key. Improvements have been made by the installation of touchscreen ordering and allowing consumers to order on mobiles. This needs to be rolled out further and faster to streamline operations. This isn’t just a case of installing and implementing the technology; it is about getting customers to actually use it. Consumers need to be given more incentives to use the new ways of ordering, especially mobile, as many still shun the technology. Longer term, more automation in the kitchen is also critical and will be particularly beneficial with the varied and complex menu options.
On the menu innovation front, we applaud McDonald’s push to drive more breakfast trade by introducing items like triple stacks. However, the breakfast daypart has become far more competitive, so further innovation and deals will be required to keep momentum going.
Overall, we are not discouraged by McDonald’s latest numbers and believe that the company is still on the right track. However, 2019 will be a more challenging year than 2018 and it will be a balancing act between keeping both customers and franchisees happy.
Neil Saunders is managing director of research firm GlobalData Retail.