May 6, 2019 | Report Announcements

McDonald’s is gaining traction with an extremely ambitious modernization program with many moving parts. Its repositioning strategy includes: retaining existing customers by bolstering core strength in family occasions & food-led breakfast; regaining lost customers by improving food taste, quality, convenience & value; and converting casual customers to committed by elevating & leveraging the McCafé platform while also improving its food health profile. To this end, its menu positioning continues to transition to fresh & healthy and its food journey has included: adding fresh beef to its Quarter Pounder burgers (an answer to Wendy’s); re-introduction of McCafe espresso products to better position against Dunkin’; intro of Buttermilk Crispy Tenders (an answer to Chick-fil-A); reduced use of antibiotics in its beef supply chains; removal of artificial preservatives in its Chicken McNuggets; and improved health profile for its Happy Meals. The goal is to convert casual traffic into committed customers who can be comfortable that higher frequency at McDonald’s can actually support good health. In turn, the brand’s people & facility investments provide it with authority to discuss menu improvements which appeal to families & younger consumers. While comps have outperformed for the last 2 years, traffic declined in 2018 and into 1Q19 (which reflects the chain’s upscale repositioning). Going forward traffic should benefit from: an effort to run better restaurants (digesting all the recent changes & reducing executional complexities) with a renewed focus on drive-thru ops; plans to fine-tune value deal promotions; refinements in digital & delivery; and progress with EOTF and reimaging. Also, corporate expects to win back breakfast traffic with a combination of: national value; a return to local breakfast deals in recognition of differing regional preferences; and new food offerings. In any case, the brand continues to struggle with balancing its need to provide value to drive traffic with its desire to move towards higher margin, more upscale products. Just as value is foundational to this brand, so is service speed/convenience and in a well justified sprint to modernize, the system has added operational complexities which have slowed speeds. Declining store-level profits, increased capex requirements and increasing operational complexity has prompted the recent organization of the National Owners Association to represent the concerns of 1,000 franchisees and operators report that cooperation between franchisor & franchisees has improved as a result. In conclusion, there was no easy way to modernize McDonald’s in a timely fashion and now the hard work of digesting & integrating all these changes is underway – hopefully, execution will proceed as fast as the implementation of the pivot.

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