Morningstar | Menu, Digital, Delivery, and Experience Plans Position McDonald's for Evolving Industry Trends
McDonald's CEO Steve Easterbrook set in motion a major turnaround in 2015, including reorganizing the company into four segments based on the maturity and competitive position of its different markets, refranchising 4,000 locations the past two years (and targeting longer-term franchisee system ownership of 95%), and eliminating $500 million in net annual selling, general, and administrative expenses. The company is also emphasizing a number of "velocity growth accelerators," including (1) an Experience of the Future layout, which features a combination of ordering flexibility (including counter, kiosk, web, and mobile ordering), customer experience (including a blend of front counter, table service, and curbside delivery), and a menu that's more streamlined but still allows for personalization; (2) mobile ordering and payments; and (3) delivery alternatives. We believe these initiatives have already started to make McDonald's a more agile organization more closely aligned with evolving consumer restaurant preferences.Early results of the initiatives have been promising, with a return to positive global comps in 2016 and 2017. We're particularly encouraged that the sales improvement hasn't been a function of a single factor, but rather a combination of recipe changes using higher-quality ingredients and incremental labor investments and training (improving speed of service and order accuracy). Additionally, the rapid rollout of all-day breakfast in the United States and other markets implies McDonald's is overcoming previous supply chain and execution issues, and it portends a more seamless rollout for new products and technologies. While the company must still contend with aggressive industry promotional activity, a wide food at home/food away from home price gap (limiting near-term pricing opportunities) and wage increases across many global markets, we're confident that it can return to and sustain normalized mid-single-digit system sales growth and mid- to high-single-digit operating income growth--suggesting operating margins improving to the high-40s over the next five years--through refranchising efforts and its customer experience/digital initiatives.McDonald's franchises and operates McDonald's restaurants. The company's menu includes hamburgers and cheeseburgers, Big Mac, Quarter Pounder with Cheese, Filet-O-Fish, several chicken sandwiches, Chicken McNuggets, wraps, fries, shakes, McFlurry desserts, sundaes, soft serve cones, pies, soft drinks, coffee, McCafe beverages and other beverages. The company's restaurants in the United States and various international markets provide a full or limited breakfast menu. Breakfast offerings may include Egg McMuffin, Sausage McMuffin with Egg, McGriddles, biscuit and bagel sandwiches and hotcakes. The restaurants also sells a variety of other products during limited-time promotions
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