Key Takeaways for McDonald’s Stock:
- Costs are up and traffic is declining in the fast-food industry
- McDonald's is adapting well to the new environment, with nearly 40% of sales now digital
- We foresee continued market share gains as McDonald’s returns to unit growth at home for the first time since the 2010s
Andrew Willis: Despite rising fast food prices, we still find the occasion or two for fast food – even if we’re buying something from the value menu rather than the tempting showcase combo.
What does this mean for fast food operators? Their customers are now more value sensitive, while food and other input costs continue to rise… And McDonald’s (MCD), perhaps unsurprisingly, may have the best answer. Leverage your procurement network, automate as much as possible, and develop loyalty programs that encourage volume.
McDonald’s Owns the Value Menu
Equity analyst Sean Dunlop says that McDonald’s is able to offer its products at attractive price points with equal or better margin performance than competitors. And while traffic is declining, McDonald’s is capturing more of what traffic there is, with value-oriented fare and menu development.
McDonald's is also capturing more of that customer base with loyalty programs, which provide a discount but help drive volume. And app-based ordering covers much of the automation and cost savings there.
Digital sales at Mcdonald's now comprise nearly 40% of systemwide sales in the firm’s top 6 markets, which shows the company is executing well on its ‘four Ds’ strategy: digital, drive-thru, delivery and development. Franchisees appear to be ‘happy’ so far, with restaurant unit growth in its home market for the first time since the 2010s – so it sounds like they have the right recipe.
For Morningstar, I’m Andrew Willis.
McDonald's Bulls Say
- With a modernized restaurant real estate footprint after US$9 billion in remodeling investments, McDonald’s is well positioned to take advantage of evolving digital ordering habits.
- McDonald's swelling loyalty member base visits 15% more frequently than they did pre-adoption, suggesting that the program could prove a multiyear driver of comparable store sales.
- As the low-cost operator in the space, input cost inflation and consumer pressure offer McDonald’s a chance to gain share in key markets.
McDonald's Bears Say
- Wage inflation, particularly in the U.S., could result in an increase in price competition, additional investments in automation, and a shift toward relatively cheaper substitutes in the food-at-home category.
- While improving, low satisfaction scores relative to industry benchmarks could impair the brand if left unresolved, threatening McDonald’s pricing power if the firm is unable to meet changing customer demands.
- Sensitivities to sometimes irrational pricing pressure and limited-time offers can pressure results, as seen during the chicken sandwich wars.
Editor's Note: All images are courtesy of Unsplash.com and AP Images.
