McDonald’s, the world’s largest burger chain, has acknowledged that it has lost 500 million customer transactions in the United States since 2012. The company has also recorded its fourth straight year of declining guest counts at U.S. locations in 2016. On Wednesday, the company unveiled its long-term global growth plan during the company’s Investor Day event in downtown Chicago.
President and Chief Executive Officer Steve Easterbrook , who took over in March 2015, and members of the senior management team presented its growth plan, financial targets, and outlined the initiatives to unlock meaningful growth and increase guest counts.
According to a company news release, the growth plan focuses on:
- Enhancing digital capabilities and the use of technology to dramatically elevate the customer experience
- Redefining customer convenience through delivery
- Accelerating deployment of Experience of the Future restaurants in the United States
- Initiating a new 3-year target for cash return to shareholders, and
- Establishing new financial targets for Sales, Operating Margin, Earnings per Share and Return on Incremental Invested Capital
“We are building a better McDonald’s, one that makes delicious feel good moments easy for everyone, and I believe the moves we are making will reassert McDonald’s as the global leader in the informal eating out category, ” Easterbrook said. “To deliver sustained growth, we have to attract more customers, more often,” said Easterbrook. “Our greatest opportunities reside at the very heart of our brand – our food, value and the customer experience.”
The strategy connects key tenets of the brand to well-defined customer groups built around three pillars:
- Retaining existing customers by fortifying and extending areas of strength. Through a renewed focus on areas such as family occasions and food-led breakfast and transforming the experience in our restaurants, McDonald’s will build on the strong foothold it has and grow the core of the business.
- Regaining customers lost to other QSR competitors. As customers’ expectations increased, McDonald’s simply did not keep pace with them. Making meaningful improvements in quality, convenience and value will win back some of McDonald’s best customers.
- Converting casual customers to committed customers by being more present in underdeveloped categories and occasions and competing more aggressively given the untapped demand for McCafé coffee and other snack offerings.
McDonald’s also said it is accelerating digital capabilities and enhancing its use of technology in restaurants, in the drive-thru, and on the go. Inside the restaurants, the company said it is bringing greater control, convenience and personalization to its customers through the use of kiosks to place orders. Customers will be able to place their order and skip the front counter entirely, with their food brought right to their table. Additionally, customers will be able to place orders directly on the mobile app for pickup.
By enabling mobile order and pay through the McDonald’s app, customers can personalize their order while skipping the drive-thru line and instead choosing curbside delivery, the company said. McDonald’s said that mobile order and pay will be launched in 20,000 restaurants in some of our largest markets, including the United States by the end of 2017.
In addition, the company said it is uniquely positioned to become the global leader in delivery. In McDonald’s top five markets (U.S., France, the U.K., Germany and Canada) nearly 75 percent of the population lives within three miles of a McDonald’s.
McDonald’s is already one of the largest providers of delivered food in the world, with annual Systemwide delivery sales of nearly $1 billion across various markets including China, South Korea and Singapore. China has tripled its delivery business since its launch in 2008. In 2016 alone, China’s delivery business grew 30 percent.
Currently, McDonald’s is experimenting with different delivery models including partnering with third parties for ordering and fulfillment throughout the world.
The company also said Experience of the Future Restaurants elevates the customer experience at McDonald’s to provide a more convenient, more personalized and more enjoyable visit. It leverages the convenience and technology of kiosk ordering and table service, increasing functionality of the mobile app to enhance the enjoyment of our food and the hospitality of the McDonald’s crew, all in a more modern, more exciting restaurant environment.
In the near-term, McDonald’s is redirecting a portion of capital saved from refranchising to modernizing the U.S. estate. The company plans to reimage about 650 restaurants in 2017. When combined with previously modernized restaurants, which will be updated with Experience of the Future elements this year, the U.S. will have approximately 2,500 Experience of the Future restaurants by the end of 2017. McDonald’s also said it intends to have most of the traditional free-standing U.S. restaurants modernized to reflect the Experience of the Future by the end of 2020.
In November of 2015, the company provided targets for its refranchising, G&A savings and cash return to shareholders. The Company updated its progress against these targets, specifically noting the following:
- Refranchising – the Company is on track to refranchise 4,000 restaurants by the end of 2017, a full year ahead of schedule. Once completed, this will bring the company’s global franchised percentage to approximately 93 percent.
- Cost Savings – the company achieved more than $200 million in savings through the end of 2016 towards its goal of reducing net G&A levels by $500 million by the end of 2018, and expects to trim another 5 to 10 percent from its remaining cost base by the end of 2019.
- Cash Return to Shareholders – 2016 marked the achievement of the company’s 3-year target of $30 billion cash return to shareholders. Today, the company announced a new $22 to $24 billion cash return target for the 3-year period ending 2019, reinforcing management’s confidence in the company’s long-term strategies and financial targets.
Financial Performance Expectations for 2019 and Beyond
“Over the last two years we’ve fundamentally enhanced the strength and stability of our business by shifting our ownership structure and reducing capital and G&A needs going forward. We are now squarely focused on growing global top-line sales and guest counts to directly support our critical revenue stream,” said Chief Financial Officer Kevin Ozan. McDonald’s business model supports the company’s ability to achieve and sustain the following updated long-term, average annual constant currency financial targets, beginning in 2019:
- Systemwide sales growth of 3% to 5%;
- Grow operating margin from the high-20% range to the mid-40% range;
- Earnings per share growth in the high-single digits; and
- Raise the return on incremental invested capital target from the high-teens to the mid-20% range.
