McDonald’s enjoys substantial brand equity as the largest and most influential domestic brand, with positioning around: brand trust (built around billion-dollar iconic brands including the Big Mac, Quarter Pounder, chicken nuggets & fries); compelling price/value & convenience (75% of population lives within 3 miles of a McDonald’s); and culturally relevant marketing. A recently completed modernization of the “U.S. estate” has resulted in a better, slightly different perception of the brand. The new “Accelerating the Arches” strategy is based upon following growth pillars: Maximize Marketing – goal is to tap into today’s youth & culture with an emphasis on social media influencers; Commitment to Core Menu; and Doubling Down on the 4D’s – digital, delivery, drive thru & development. A focus on core, iconic menu items (that resonate with 80% of consumers who prefer products they are familiar with) helps minimize operational distractions while helping with service speed. Recent comp strength reflects: strategic menu price increases; strong operations; effective marketing campaigns featuring the core menu; and continued digital & delivery growth. Despite a difficult macro environment, the system enjoys strong unit-level profitability and valuation multiples. All-the-same, the chain’s base case for 2023 is a mild to moderate recession and the strategy is to balance further price increases with the retention of its leadership in affordability & value for money. This is challenging given the system’s already steep menu price increases over the last couple of years which have strained McDonald’s important value orientation, even if the brand’s relative value positioning remains competitive. Further, slower drive-thru speeds have been a long-term challenge and increasing store-level complexities (including a ramping digital mix) further challenges operations. To make matters worse, franchisees are unhappy with stricter standards associated with the reinstated PACE store inspection program while the franchisor is unhappy with those operators who are unwilling to embrace its strategic vision to finish modernizing the system. In conclusion, while McDonald’s is well positioned for the long-term with solid execution around sound fundamentals, the current macro environment may prompt its core value-oriented customers to demand more deals and concessions than the system is prepared for.
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