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Will McDonald’s Strategic Initiatives Fuel Higher Sales?

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McDonald’s (MCD) stock has risen 10.5% so far this year. Lackluster performance amid growing competition has impacted the fast-food chain’s stock. In addition, it lags behind the 28.6% rise in the S&P 500. Notably, it has also underperformed peers Chipotle Mexican Grill (CMG), Shake Shack (SHAK), Wendy’s (WEN), Dunkin’ Brands (DNKN), and Starbucks (SBUX). These companies have risen 91.8%, 31.9%, 41.1%, 14.9%, and 37.0% year-to-date, respectively, as of December 23.

McDonald’s reported weaker-than-expected third-quarter results in October. The company reported strong comparable sales growth of 5.9%. However, its revenue lagged analysts’ estimates. The company’s revenue grew 1.1% year-over-year to $5.43 billion but lagged Wall Street’s estimate of $5.49 billion. Adjusted EPS declined about 2% year-over-year to $2.11, which was significantly behind analysts’ forecasts of $2.21.

Amid weak quarterly earnings and an abrupt CEO exit, analysts have still maintained a bullish outlook for the stock. Notably, out of the 35 analysts who follow the stock, 25 analysts have rated the stock as a “buy.” The other ten analysts have a “hold” rating. Currently, analysts have recommended a target price of $223.07. This target price implies an upside potential of about 14% over the next twelve months.

McDonald’s Velocity Growth Plan

The world’s largest fast-food restaurant chain has begun using technology in new ways and is innovating its menu items. It’s taking these steps to increase its global guest count and customer satisfaction levels. McDonald’s operates in over 100 countries. It has been innovating its menu to cater to specific customer tastes and preferences.

In 2017, the company announced a strategy called the Velocity Growth Plan. This plan has three key focus areas:

  • Retaining existing customers.
  • Regaining customers lost to other quick-service restaurants.
  • Converting casual consumers to committed consumers by enhancing the company’s underdeveloped categories.

The company has been trying to enhance its customer experience through faster delivery, increased digital capabilities, and by modernizing its restaurants. Plus, as part of this plan, the company has been using technology and digital platforms to serve its customers’ needs.

Building a digital footprint

In September, McDonald’s announced its plans to acquire the technology start-up firm, Apprente. Apprente was founded in 2017 and has established itself as a leader in voice-based technology. McDonald’s will use Apprente’s voice-based platform to take orders at its Drive-Thru windows faster and more accurately. The company also sees the potential to use this technology in mobile ordering and kiosks.

Earlier in the year, McDonald’s acquired the personalization firm, Dynamic Yield. This company uses machine learning technology to help businesses in fields such as e-commerce and travel. McDonald’s is using Dynamic Yield’s AI-powered personalization platform at its Drive-Thrus. The new technology suggests order choices based on factors like weather, time of day, and the popularity of menu items.

Machine learning will help to develop dynamic digital menu boards. These menu boards will suggest items that customers are likely to order. So, the suggestions will reduce order-processing lead time, thereby increasing Drive-Thru and general transactions. McDonald’s has now adopted Dynamic Yield technology in over 9,500 US Drive-Thrus. The company is aiming for a full rollout to every US restaurant with an outdoor digital menu board by the end of this year.

Meanwhile, the rival restaurant chain Chipotle has been using AI-enabled voice assistants for phone orders. Notably, Chipotle has implemented this AI technology in around 1,800 of its US locations.

McDelivery

Convenience and faster delivery are key features that consumers want from restaurants. Food delivery apps like Uber Eats and Seamless have grown rapidly in recent years. Meanwhile, McDonald’s decision to expand its McDelivery business has reaped great rewards. McDelivery receives an average of ten orders per second worldwide. On the third-quarter conference call, the company stated that McDelivery is available at 23,000 locations in over 80 countries.

McDonald’s estimates that its delivery business will reach $4 billion and account for around 4% of its global sales. The company is seeing a stable global average check for McDelivery at twice the average restaurant check.

In July, the company added DoorDash as its new delivery partner in the US. Uber Eats had been McDonald’s exclusive delivery partner since 2017. Meanwhile, McDonald’s has added multiple delivery partners in various locations such as Russia, Spain, Italy, and Canada. Likewise, McDonald’s peer Taco Bell has a delivery partnership with Grubhub, while Chipotle is using DoorDash to increase its delivery reach.

McDonald’s Experience of the Future

One of the major components of the Velocity Growth Plan is the Experience of the Future (or EOTF). The plan includes the modernization of all McDonald’s restaurants around the world. McDonald’s plans to elevate its customer experience by providing more personalized and pleasant visits to its restaurants.

EOTF uses kiosk ordering technology and convenient table service to enhance customer satisfaction. It also involves plans to innovate menu items and increase the use of mobile ordering apps. McDonald’s has transformed 1,500 stores to EOTF this year, which is in line with its goal of 2,000 EOTF restaurants by the end of the year. Notably, McDonald’s has over 9,000 EOTF restaurants in the US, which represents about two-thirds of its US network. It believes that these EOTF restaurants have been driving comparable sales growth.

As a part of innovating its menu items, McDonald’s launched the P.L.T (plant, lettuce, tomato) burger in partnership with Beyond Meat (BYND). So, in September, McDonald’s began testing the plant-based burgers at 28 locations in Canada, including the city of Toronto. This move comes amid the emergence of the vegan movement. According to CNN, there were speculations that McDonald’s would partner with Nestlé to launch a vegan burger in North America. Earlier, Nestlé partnered with McDonald’s in Germany to offer a vegan burger called the Big Vegan TS.

Moving into the last quarter, the company expects its Velocity Growth Plan to generate benefits. These benefits will include maintaining its existing customers and gaining new customers across national and international locations.

Currently, analysts expect McDonald’s revenue to be almost flat at $21.0 billion in 2019. However, they expect a 2.9% revenue growth in 2020, backed by the company’s growth initiatives.

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