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Morningstar | Velocity Drivers, Franchisee Alignment, and Technology Investments Reinforce McDonald's Growth Story

McDonald's CEO Steve Easterbrook set in motion a major turnaround in 2015, including reorganizing the company into segments based on the maturity and competitive position of its different markets, refranchising more than 4,000 locations (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 aligned with evolving consumer restaurant preferences.Early results of the initiatives have been promising, with positive global comparable sales growth over 2016-18. 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, incremental labor investments and training (improving speed of service and order accuracy), and new technologies. 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 suggests a more seamless rollout for new products. 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/delivery initiatives.