Despite investors' approval of McDonald's strategy to revamp U.S. restaurant locations, operators aren't loving it — and claim cash flow is lacking.
— Danni Santana
Higher average checks, resulting from menu price increases and product mix shifts, drove McDonald’s global same-store sales in the third quarter, as the company homes in on aggressively expanding its overhaul of its U.S. franchise locations.
According to the restaurant chain, menu prices increased two percent in the quarter, leading to a same-store sales increase of 2.4 percent. Customers were also satisfied with the expansion of McDonald’s $1 $2 $3 value menu offerings — introducing $1 any-size coffee and including popular breakfast sandwiches at the same price. Consumers can expect even more breakfast options by the end of the year, according to the company. An influx of self-serve customer kiosks added to U.S. outposts also impacted sales growth.
“We still have hard work ahead, but we’re seeing an encouraging response from customers in restaurants where many of these improvements are already completed,” said CEO Steve Easterbrook, in an earnings call with investors. “As we have discussed before, the U.S. team and our franchisees are taking on a lot all at once. The U.S. is maintaining an aggressive pace of modernizing restaurants.”
McDonald’s expects to complete the revamp of 12,000 U.S. restaurants by the end of 2019, making it the largest construction project in its history, according to the company.
The performance of international markets, up 5.4 percent in comparable store sales, is allowing the restaurant chain to double down on its U.S. strategy. Many countries, including Canada, China, and parts of Europe have undergone similar transformations in recent years. The U.S. does, however, pose a greater challenge, as it’s the company’s largest market.
Franchisees Want Tangible Results
U.S. franchise operators have also yet to reap the benefits of the restaurant chain’s innovation strategy. Store operators met earlier this month to discuss the creation of an independent franchisee association. The meeting represented nearly one-quarter of the company’s 13,000 domestic locations.
Despite successful investments into kiosks, its mobile app, and a delivery partnership with UberEats — delivering from over 15,000 restaurants worldwide — both earnings and revenue declined from a year ago, thanks to higher labor costs and aforementioned tech expenses.
In McDonald’s view, matching guest count per franchise with the growth in average check size remains the key obstacle. While average check and customer satisfaction continue to grow, guest count numbers remain stagnant. The environment around value food offerings is also more competitive in the U.S, the company said.
Early results from McDonald’s “experience of the future” (EOTF) strategy in the U.S. provides a snapshot of what current growing pains could lead to for franchisees, Easterbrook said. EOTF restaurants feature digital order kiosks, curbside pickup, and improved drive-thru experiences. Data shows the performance of restaurants that have adopted any of the EOTF initiatives far exceed restaurants that haven’t in both sales and guest count performance.
“This is about getting the guest count moving. If we can generate that and maintain the average check growth, then that’s going to be a lot more profitable for our owner-operators.”