Key Points:
- McDonald’s topline metrics and observed traffic, dwell, and frequency aren’t going in the right direction; high gas prices are hurting, and consumer / competitive challenges are longer-term issues to address.
- McDonald’s serves the entirety of the consumer spectrum. Playing to niches isn’t going to work. As such, improving the trends will require broad and bold initiatives and time (like well into 2027).
- Today’s investor meeting laid out refreshes to the menu (more protein in the burger, more chicken, and an upgrade to caffeinated), enhanced service, and an upgrade cycle for the stores at $800K-per which entails upgraded play places, improved dining rooms with more lights, and more open kitchens.
- More service is to come from taking behind-the-counter tasks out (AI) and redeploying the hours and $’s into more smiles at the front. We interpret this to be $3.5B, or +$98K per location in more smiles.
Big picture, McDonald’s needs a strategy to drive consistent comp-sales growth in an economy that is: (1) stuck with a high cost of living, (2) a secular K-shaped consumer where outsized real expenditure growth is driven by wealth vs. well-distributed income, and (3) little-to-no population growth in the under 65-years of age cohort. Additionally, competition for share-of-stomach is fierce between QSR national brands, feisty independents (which are taking share), better gas & confidence offerings, an improving and expanding prepared food offering at grocery, and home cooking on the cheap. The consumer has become more discerning both in its desire for different flavor profiles / functional attributes (ethnic, high-protein, less carbs, etc) and fewer calories (GLP-1s). To contextualize how management views the ongoing environment, they expect inflation to push higher and for QSR industry traffic to run flat; they are not counting on any macro improvement in the future, but are still targeting US comp-sales growth of 3-4%. As such, to grow, they need to gain share. (The US market is the focus of this note.)
To address these, McDonald’s has initiated its “NEXT” strategy, which is to “unlock our next phase of growth and productivity, by bringing in more customers more often and improving unit economics.” How they intend to do so was answered at Wednesday’s Investor meeting. It’s not an easy fix given that McDonald’s serves the entirety of the consumer spectrum; as such, they can’t easily drive into pockets of growth, or niche, rather they need broad and encompassing strategies. For example, looking at Advan customer segmentation, versus the general population, the visitor mix for Chipotle and Starbuck are each 1.2X more idiosyncratic to the general population than McDonald’s*.
In addition to the above, McDonald’s owns execution mistakes this year such as too many events, ineffective price promotions, too much complexity for its franchise operators, and the list of issues that CEO Chris Kempczinski enumerated on the last earnings call. We point readers to our story on Q2 results and trends -McDonald’s Messy Q2: Setting up next year’s easy comp. What shocked us in the data (for Q2) was an increase in dwell time (too long to serve orders), a decrease in conversion rate (too much discombobulation at the restaurants such that some visitors just turned around and left), and a large decrease in visit frequency. For August and July, the trend in frequency and dwell time are still “uncomfortable.” Anecdotally, we stopped at McDonald’s last night in Fillmore, California. All of the windows were covered with drink menu promotions and one could not see outside / inside; it was like being in an institutional basement. Very unwelcoming and very un-Californian, where Californians like to see the sky, palm trees, and their cars.
We’ve also read amply that there is rising dissatisfaction in how McDonald’s serves its customers vs. competitors like In-N-Out, not enough smiles and too much technology. McDonald’s has expressed an intent to level-up hospitality. Starbucks has had notable recent success with its pivot; however, Starbucks is largely an owned business vs. McDonald’s being largely a franchised business. As such, a pivot is more operationally challenging. (Except on initiatives that are effectively shooting at one’s own foot). More service / hospitality, per today’s news, is to come from taking behind-the-counter tasks out (AI) and redeploying the hours and $’s into more smiles at the front. We interpret this to be $3.5B, or +$98K per location in more smiles
Per the near term per Advan, traffic in July and August were adversely impacted by the renewed rise in gas prices. Traffic for July decelerated -90bps from June’s rate, and August a further -40bps, and the softness is industry-wide (Burger QSR). On an underlying basis, September has kind of flattened out, However, in other menu categories, Chipotle and Chick-fil-A had a better July / August vs. their Q2 figures (May was a difficult month for most brands). We understand the current expectation for McDonald’s US comps is flat. Flat would keep the 2- and 3-year comp-CAGRs similar QoQ. Wednesday’s event broadly supported our observations.
On the near-term, management shared that July and August comp-ed negative, but September was positive. In terms of her role / fingerprints, US leader Sky Anderson said, “So you'll certainly find of doing two things: trying to simplify operations and get our restaurant teams a lot more focused on doing fewer things well. And then also knowing that we have some elements of our value strategy that are actually working making sure that we're redirecting our marketing efforts into the things that are working. So for the back part of the year, you'll see us really just help the restaurants get quite focused on execution, particularly around taste and quality. But then also, you'll see us leaning a lot more into things like EVMs and meal bundles and digital offers, which are really the things that are working right now. In concept, we're obviously doing a lot of testing around what the evolution of our new entry-level value program will be, which more to come in the new year.”
Per the message / share at the investor day, Kempczinski said the following:
The industry growth algorithm is changing. We expect industry traffic growth in our wholly-owned markets will be flat, while inflation remains elevated. For McDonald's to succeed in that environment, growth must come from capturing greater share… The winners will be the companies that create more demand and deliver it more efficiently. That makes two priorities critical to generating strong shareholder returns, share gains and productivity. We must be the first choice for more customers more often… We will elevate the taste, quality and customer experience to earn more First Choice visits. More First Choice visits, create guest count growth...
The four pillars of NEXT each leverage the power of our scale to capture opportunities a few others can match. Menu NEXT creates more reasons to choose McDonald's. Our focus is tasting quality across the categories with the greatest opportunity, chicken, beverages, and beef… The outcome is stronger preference, more First Choice visits and guest count growth. Importantly, as we elevate our focus on taste and quality, value remains foundational, great value and great taste are not competing ideas... Consumer NEXT turns that preference into more demand through loyalty, personalization, partnerships and a deeper understanding of our customers will build increase frequency and create demand that drives more visits over time.
Restaurant NEXT catalyzes growth and fuels productivity, by simplifying operations, modernizing restaurant design and deploying AI-enabled tools at scale will improve execution, strengthen restaurant economics and unlock restaurant level efficiency. And people NEXT turns our people advantage into hospitality at scale. Better train, better equipped teams create better customer experiences. Hospitality and better customer experiences, strengthen preference drive repeat visits and reinforce our growth and productivity engine…
Over the next few years, you'll see the biggest upgrade to the taste and quality of our menu in McDonald's history, driving 1.5 share points of gain in both chicken and beverages, while maintaining our strong leadership in beef. You'll see us deliver about 250 basis points of gross restaurant-level efficiency as McDonald's next elements are deployed across our wholly owned markets.
On the theme of “more chicken,” (if the category wasn’t already extremely competitive) exec Jill McDonald said:
First, Gold Standard chicken applies what we've learned from billions of servings to make our chicken even better… Deployment of Gold Standard chicken across our top six markets has begun and will be complete in 2027. Second, we're expanding our strongest chicken platforms. A significant portion of our chicken headroom sits in pieces. Starting with Chicken McNuggets… We'll build on that momentum by expanding the platform through new flavors signature sauces, product extensions and cultural activations. Third, we're innovating to expand our presence across more chicken categories. We'll build on the momentum of McCrispy by continuing to introduce new options of our McCrispy sandwich, scaling the strips made with a new recipe already deployed in the U.S. extending the successful wings platform into additional markets and introducing grilled chicken sandwiches and wraps to meet growing demand for high-protein options.”
On “more caffeine” (which also gets more competitive every day) she said:
First Choice occasion starts with a great cup of coffee. Gold Standard Coffee focuses on enhancing the taste of all 8 million cups of coffee we serve a day through fresher beans, new recipes, and upgraded equipment. New espresso machines in the U.S. will give customers more ways to personalize their coffee, including alternative milk choices. Gold Standard Coffee will be deployed in… the U.S. and additional markets in 2027. Together, expanding our beverage platforms and elevating our coffee experience will earn our status as the first choice for more of our customers around the world, which will drive more guest counts.
On GLP-1s (a frequent topic of ours), Sky Anderson said:
We've been closely monitoring adoption, behavior shifts and many preferences including the rise of GLP-1 medications. In the U.S., approximately 10% of adults use GLP-1s. And of those households with GLP-1 users, guess how many visit McDonald's, 84%. Let me say that again, 84% of households with GLP-1 users visit McDonald's. This is an opportunity. We don't need to win a new base of customers into McDonald's. Instead, we need to keep giving them more reasons to make McDonald's their First Choice as their eating habits evolve. They want more protein, greater portion flexibility, and through that leaves them feeling satisfied without feeling like too much. Our menu already gives customers built-in choice.,,
This trend extends beyond GLP-1 users, way beyond. So while there's roughly 30 million GLP-1 users in the U.S. today, there are nearly 16 million Americans who are actively seeking more protein in their diet. That broader protein-seeking audience creates a much larger growth opportunity. McDonald's has a strong right to win in protein-led categories, including grilled chicken, chicken bowls protein with breakfast and snack wraps. And our approach is balanced. Taste led protein forward innovation with disciplined deployment. All calibrated to minimize complexity in our restaurants… We already have the customers. We already have the protein credentials portion flexibility and scale to set us up to win as taste change. Now we're building on those advantages to create more reasons to visit McDonald's more often.
