McDonald’s in resurgence?

McDonald'sTurnaround efforts are paying dividends for McDonald’s.

The fast food giant’s latest results show continued progress with global comparable sales up 5 per cent, while the US had a very strong quarter with comparable sales rising 5.7 per cent.

This momentum is important as it signals McDonald’s is reconnecting with consumers which is driving both customer traffic and sales. This has been the result of a number of changes, especially in the core US market.

The first of these is the reengineering of the menu, including the introduction of all day breakfasts. While this has added to operational complexity, it has been a vital step in providing more choice and variety – which, according to our research, are two of the main things that lapsed McDonald’s customers mentioned as reasons for their defection. The early signs are that this step change has been successful in attracting back lost customers, especially over the important lunchtime period.

Menu enhancement has also resulted in the addition of more premium and healthy options; something that will continue into this year as McDonald’s tries out new items like kale salads. While these changes are unlikely to attract highly health conscious consumers, and arguably will never be the mainstay of McDonald’s menu, offering them is an important positioning statement. It will help the company compete more successfully against some of its more premium rivals, as well as ensuring that the needs of all members of families or groups who visit are satisfied.

Making menus more premium is all well and good but this forms part of a difficult balancing act – not least because low prices and good value remain key motivating factors for trips to McDonald’s. Here we are encouraged by the company’s decision to roll out the new McPick2 menu (in the US), which allows a choice of two options for $2. After the abandonment of of the popular Dollar Menu, and the bungled attempts at replacing it with unsatisfactory alternatives like the Dollar Menu & More, this gives McDonald’s US the firepower to compete against rivals like Wendy’s and Chik-fil-A.

The final positive shift is the demonstration of greater flexibility in menu options through things like digital menu boards, which allow changes to be made according to weather and other conditions. This has helped to increase conversion rate and average spend per customer.

Naturally, the downside of all this greater flexibility is that it adds to complexity, cost and makes operations somewhat slower than they once were. This has, in fact, been the main source of complaint from some franchisees. However, in our view this is very much a case of there being no alternative: the market has changed and the customer has slightly different priorities now to 10 years ago. McDonald’s had to move with the times or face continued deterioration.

At a corporate level, the decision to convert more stores to the franchise model is savvy. The next few years are likely to see more operational complexity and higher costs for developments like store enhancements. These things will be easier and faster to manage, both operationally and financially, via the franchised model.

  • Neil Saunders is CEO of retail analyst Conlumino.

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