Apr 24, 2020 | Report Announcements

McDonald’s is gaining traction with an extremely ambitious modernization program with many moving parts that include efforts to: retain existing customers by bolstering core strength in family occasions & food-led breakfast; regain lost customers by improving food taste, quality, convenience & value; and convert casual customers to committed by elevating & leveraging the McCafé platform (snacking daypart) while also improving its food health profile. The brand seeks to attract a new, hipper, technophile customer who can afford higher prices. To this end, fresh & healthy menu upgrades include: fresh beef Quarter Pounders (an answer to Wendy’s); McCafe espresso products to better position against Dunkin’ & BK’s push into coffee; Buttermilk Crispy Tenders (an answer to Chick-fil-A); use of more clean ingredients; and an improved health profile for its Happy Meals. Notably, comps have increased +7.5% during the 2 year period through 2019, reflecting very healthy check increases which have benefit from steep price hikes (strategy was to implement price increase on premium products before national value roll-out) and high-ticket sales from kiosks, AI upselling at the drive-thru & delivery. However, substantial increases in the average check has masked traffic losses from price sensitive customers. This highlights the need for the brand to find a value equation that can work in concert with its check building strategy without driving cannibalization and this may require local value solutions as the chain has identified that 25% of its markets account for half of its traffic losses. Ramping competition in breakfast and coffee represents another important challenge for McDonald’s. It is notable that despite all the added complexities driven by the chain’s upgrades, service speeds are beginning to improve along with record high customer satisfaction scores. Further, 70% of the system has been upgraded to its Experience of the Future (EOTF) remodel platform, improving access by facilitating mobile order & pay, curbside pick-up, self-order kiosks and McDelivery. Taken together, 2019 EBITDAR dollar profits were at a system high, helping with cash flow pressure driven by increasing capex investments and substantial rents. In conclusion, while McDonald’s continues to progress nicely on its modern re-positioning and check building strategy, it must also find a way to leverage value to stem traffic losses without cannibalizing its hard-fought gains in its average check.

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