McDonald’s CEO: People Will Return to Familiar Brands

    Drive-thru business has increased to 90 percent of the fast-food chain's U.S. sales.

    McDonald's line of Big Mac's.
    McDonald's
    McDonald's found success in China with a Big Mac promotion, providing hope core menu items will resonate after COVID-19.

    The spending habits of McDonald’s customers have tilted not unlike other fast-food competitors in recent weeks. CFO Kevin Ozan said Thursday 90 percent of sales are now coming via drive thru business, up from roughly two-thirds. And in more recent days, average check lifted significantly as solo diners exit the picture and routines get steamrolled by COVID-19.

    Mainly, you can see this unfolding at breakfast. People aren’t buying an item or two and heading to work anymore.

    Additionally, McDonald’s weekend sales have taken a bigger hit than weekdays as consumers leave their homes only when necessary, Ozan said.

    But much of this is a holding pattern right now.

    “From a customer perspective, we're encouraged by some of our early learnings that lead us to believe customers will be seeking known brands and familiar routines,” CEO Chris Kempczinski said. “We're also seeing a heightened focus on value and convenience.”

    These guest trends provided some background for a tough Q1 at the world’s top-earning restaurant chain. Global same-store sales were surging in February—just north of 7 percent—before mid-March arrived and kicked all momentum sideways.

    For the month, global comps dropped 22 percent and fell 3.4 percent for the quarter. Reflecting a strong start to the period, which ended Mach 1, McDonald’s U.S. same-store sales stayed in the black at 0.1 percent. Yet they dropped 13.4 percent in March.

    Internationally, where McDonald’s faced mandates to temporarily shutter entire markets, comps sank 35 percent in March. In the second half of the month, they declined roughly 70 percent as France, Italy, Spain, and the U.K. closed all restaurants. Australia, Canada, and Germany deployed drive-thru, delivery, and takeout with limited operating hours and pared-down menus, similar to the U.S.

    Beginning in mid-March and continuing through the halfway point of April, McDonald’s domestic same-store sales tracked consistently at negative 25 percent. With check averages coming up recently and stimulus checks encouraging spending, McDonald’s expects the month to decline about 20 percent.

    Today, 75 percent or so of the chain’s 39,000 restaurants globally are operational, including the majority of its 13,900-unit domestic system. Closures stateside are mostly tied to real estate, like mall venues. McDonald’s also noted it has resumed operations in nearly all of its China locations.

    Kempczinski hinted at a lengthy recovery ahead, saying “we expect these changes to persist long after the crisis is over.”

    “We've got a great foundation to build on with [our] Velocity Growth Plan, but I think it's probably fair to say that we're not just going to pick up the … playbook and kind of resume business as usual,” he said.

    A big change involves what former executive Steve Easterbrook once called “the largest construction project in our history.” McDonald’s plans to cut capital expenditures by $1 billion in 2020, primarily thanks to fewer Experience of the Future remodel projects, as well as fewer restaurant openings overall. The chain completed about 2,000 of these in 2019 to get to 70 percent coverage. And before COVID-19 arrived, McDonald’s expected to actually increase SG&A expenses 5–7 percent. The total projected bill: $2.4 billion, with $1.3 billion of that just going to McDonald’s U.S. business. And more than half of that was set aside exclusively for 1,800 EOTF redesigns.

    Ozan said Thursday McDonald’s suspended EOTF groundbreakings in the U.S. as well as new restaurant openings globally. “I view that as soon as it’s reasonably feasible to keep going on those, many of the franchisees will want to continue doing those,” he said, adding they’ve received some requests for operators hoping to remodel.

    “I would expect a lot of those would get pushed into 2021, but I think the franchisees, and rightly so, want to understand that the business is back to operating, I'll say, more normally, before they go invest substantial dollars and close their restaurants for a period of time,” Ozan said.

    Positively for McDonald’s, the company’s U.S. recovery could move quicker, or at least smoother, than its China one did. The simple reason being nearly 95 percent of domestic restaurants feature a drive thru. In China, it’s only 15 percent. So the process of getting back on line there was far more dramatic. It had to restart from zero. In China, about 25 percent of restaurants were closed in early February. They were back about two months later. Yet even so, the market continues to experience a reduced level of demand as consumers have not fully returned to former routines, Ozan said. Comps have run negative since the initial outbreak in late January. They were down more than 20 percent in Q1 and improved in April to negative mid-teens.

    Kempczinski cautioned uncertainty overall. While he believes McDonald’s “reached a trough in terms of the restaurants closed in late March,” the future remains dependent on factors outside the company’s control, like government mandates, the risk of a second wave of infection, the availability of testing, and the overall economic backdrop.

    From its China experience, in addition to closing and opening restaurants during EOTF projects, McDonald’s knows customers will not immediately revert back to pre-shutdown routines.

    Breakfast, for instance, will be a tough task to ingrain back into customer habit. “We know that a focus on our core menu will be critical due to both customer interest and familiar favorites and operational ease. We know that value will be a necessary element to reengage our customers. Each market is rebuilding their marketing calendar to reflect these learnings and many others, so we can reignite our business momentum, but our first priority has been, and will continue to be safe guarding the health and safety of our people and customers,” Kempczinski said.

    This will be pronounced early on.

    I think it's fair to say breakfast is a critical daypart for us, and so, as we start to really get into the recovery phase, getting back at breakfast business is going to be critical for us,” Ozan added. “I think the point we are trying to make on breakfast is it takes time. It's a disruption to routines. Reestablishing those routines does take time, but we plan to be very aggressive and make sure that we get back the breakfast business.”

    Gains on restaurant sales are expected to be down about $100 million in 2020. The company secured $6.5 billion of new financing in March, including $5.5 billion in bonds and a new $1 billion line of credit the company drew upon immediately. McDonald’s ended Q1 with more than $5 billion in cash on the balance sheet.

    In Q1, net income fell to $1.11 billion, or $1.47 per share, from $1.33 billion ($1.72 per share) in the year-ago period. Revenue dropped 6.2 percent to $4.71 billion.

    Kempczinski said McDonald’s is optimistic its business model will translate to post-COVID-19 times. He pointed to an example in Australia where the company had a 2-mile line at the drive thru when it reopened.

    “Our overall view is as markets start to open up this desire to really return to familiar favorites, to brands that are known is very, very powerful. And I think the fact that we also have a strong orientation toward convenience and value that I think are also two key elements,” Kempczinski said.

    McDonald’s has made 50 operational procedure changes in the U.S. alone, everything from protective barriers to masks to how frequently surfaces are cleaned.

    “I think there's probably [the case of] customers starting to venture out a little bit more, this desire to really go to familiar brands. You saw it in the at-home occasion, center of the store, familiar brands in grocery really benefited as people were staying home. I think that same dynamic is going to be at play as people start to come out looking for familiar [restaurant] brands.”