14 Feb Stock Report – McDonalds
McDonald’s is one of the oldest and most revered names in the fast-food industry and has one of the most recognisable brand names in the world. In terms of revenue, it is the largest restaurant chain globally, serving more than 69 million customers daily, in over 38,000 individual locations, and in more than 120 countries.
Founded in the 1940s by the McDonald brothers, and then modernised by businessmen Ray Kroc in the 1950s (check out the movie The Founder if you get a chance – it’s a fascinating insight into how the company grew into what it is today), you could be forgiven for thinking that the success of the business was well behind them. However, you may be surprised to learn that McDonald’s continues to lead innovation in the industry, while continually reinventing itself to provide year after year of price growth for shareholders.
McDonald’s plans to lead this innovation through the use of technology. The company made its largest acquisition in two decades in 2019 when it purchased artificial intelligence company Dynamic Yield for $300 million. The technology will be incorporated into its drive-thru and self serve kiosks to optimise menu options and increase customer spending. Menu options will change automatically depending on the time of the day, the weather in that particular location, and a customers buying history. It’s already been set up in 9,500 drive-thrus in the US.
It’s second big purchase last year was for voice recognition company Apprente, a technology which specialises in fast food ordering. It is designed to work in noisy environments, such as the hectic world of fast-food kitchens, and is an expert in picking up accents, analysing poorly structured language, and changing orders on the fly. It’s an attempt to speed up service times for customers.
Now ex-CEO Steve Easterbrook stated last year “Building our technology infrastructure and digital capabilities are fundamental to our Velocity Growth Plan and enable us to meet rising expectations from our customers, while making it simpler and even more enjoyable for crew members to serve guests”. They expect these new systems to enhance the customer’s enjoyment, and in the long run, reduce costs by requiring less staff. Would you believe they already have robotic fryers in some locations that can take an order and prepare products on their own? McDonald’s calls it the “experience of the future”.
However, all of the fanciest robots in the world won’t please consumers if the food isn’t up to scratch. McDonald’s is continually looking at ways to stay relevant to the modern consumer and their changing appetites and social requirements. The old-style ways of unhealthy, fatty, fried foods just won’t cut it with the sophisticated fast-food customers of 2020.
McDonald’s biggest move of late has been in the introduction of fresh beef into its burgers. It took four years to implement the changes and cost more than $60 million. But the risky move has been paying off, with the fast-food giant increasing its market share in burgers for the first time in five years in 2019. Similar moves, such as moving to 100% cage-free eggs by 2025 is a move to target the more aware consumer.
And while the classic menu items will always be successful, new products have need to be included to appeal to a broader base. Your cheeseburgers, Big Macs, chicken nuggets, fillet-o-fish, and French Fries will always have a place. But you can now add to this list grilled chicken sandwiches, herb fusion chicken salad, yogurt parfait, fruit and maple oatmeal, and even a simple apple if you feel the need. There’s something for everybody.
Even the vegetarians are now being targeted. The meat-free craze that has exploded over the last year or so has reached all corners of the restaurant industry, even in fast food. McDonald’s for their part have just recently signed a deal with Wall Street darling Beyond Meat (BYND) to produce a plant-based burger, made with a pattie using pea protein, canola oil, and beet juice. It’s currently being trailed in Canada, with an Australian version called the McVeggie burger being trialled in South Australia. McDonald’s says it is not just aimed at the vegetarians but at all health-conscious customers who wish to reduce the amount of meat they consume.
The chicken sandwich war of late 2019 has also been a boon for fast-food restaurants across the board and McDonald’s is looking to tap into the craze as well. What started as a pop-up chicken burger offering at fast food restaurant Popeye’s in late August erupted into one of the wildest food stories in years, selling out the product for months, causing arguments, fights, a civil war between restaurant chains, and even customer deaths. McDonald’s has now introduced two new chicken sandwiches – the Crispy Chicken and the Deluxe Crispy Chicken – which have been rolled out across the US.
Besides creating a healthier and more diverse product offering, an increase in market share is also being led by the booming food delivery phenomenon. Utilising food delivery services such as Uber Eats, Deliveroo, Just Eat, and Door Dash, McDonald’s has increased global at-home sales from $1 billion to $4 billion in just three years. That’s now 4% of its entire sales worldwide. The global food delivery industry is expected to rise to $200 billion by 2025, up from $85 billion just two years ago. And McDonald’s has only just begun to dip its toe in. Expanding this offering to all of their restaurants has the potential to boost revenue to levels it just can’t reach with in-store sales alone.
While McDonald’s continues to revamp restaurants, menus, and services the share price continues to rise. As does the dividend they pay, which has increased every year for the last forty years – since 1976 to be exact. It’s latest earnings results saw sales increase at ten-year highs so it’s got to be doing something right. Its advantage of having one of the most recognisable brand names in the world means that when it gets things right, which it seems to be doing of late, it can really make an impact in stealing market share away from competitors such as Burger King and Wendy’s. So when it comes to owning McDonald’s shareholders can definitely be heard saying – “I’m Loving it”!
The author does not hold any shares in Tesla and has not been remunerated for this report.