McDonald's Value Strategy Takes a Turn

Where it concerns value, McDonald’s has no intention to lead any race to the bottom, CEO Steve Easterbrook told investors during a July 26 conference call. “We just want to be competitive on value. And I retain that and we stand behind that,” he said.

“We don’t strive to win on value, but we wont lose, either,” added chief financial officer Kevin Ozan.

Instead, Easterbrook said the fast-food leader plans to continue to “build a moat around the business,” where improved food quality, technology, McDonald’s employee focus, and better services will make it harder for the rest of the industry to keep pace. But, in many ways, McDonald’s is still in construction mode.

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The company posted its slowest U.S. same-store sales growth in over a year in the second quarter, with domestic comps lifting 2.6 percent at units open for at least 13 months. Although the gains gave McDonald’s 12 consecutive quarters of positive same-store sales, the figure missed Wall Street estimates for the first time in at least two years, according to Reuters, with analysts calling for a 2.96 percent rise. Comps grew 4 percent globally. Revenue in Q2 was $5.35 billion, down from $6.05 billion in the year-ago period.

Global comparable guest counts declined 0.3 percent. They lifted in all international operating segments. However, U.S. quarterly guest counts decreased from last year. McDonald's didn't provide an exact number. Shares fell close to 2 percent at the bell Thursday, but were slightly up in after-hours trading.

There was a lot at play here for McDonald’s. While the company might not be leading a race to the bottom, as noted, its value proposition, notably the $1 $2 $3 Dollar Menu introduced in January, ran parallel—or perhaps inspired—competitors to increase their attention on deals, Ozan said.

“Therefore, we know that we need to be more aggressive to compete effectively,” he said. “While our $1 $2 $3 Dollar Menu is driving incremental sales and guest counts with our budget-basic value customers, we need to do more to attract other customer groups.”

McDonald’s plan to lure these other guests is to keep its everyday value platform rolling, but also to introduce additional deal offers from time-to-time. For example, the chain launched a 2 for $4 breakfast sandwich promotion in Q2. Beginning in early August, McDonald’s is bringing a 2 for $5 Mix & Match deal featuring some of its “iconic sandwiches that we know our customers love,” to market, Ozan said.

Easterbrook added that the $1 $2 $3 Dollar Menu has performed as executives hoped, especially in regards to add-ons. It just also shed light on an area McDonald’s has room to grow in—specific meal deals.

“Is there work to do? Yes,” Easterbrook said. “Are we happy with where we're at right now? No, not entirely. Are we confident that we've got the right plans in place and the support from the entire U.S. operator system? Entirely. So we're going to keep pushing on and competing hard.”

McDonald’s refranchising efforts hurt Q2 sales, the company said. It took a pretax charge of $92 million in the period from its previously announced restructuring costs, which included employee severance charges and other hits from its plan to eliminate layers of management in an effort to trim costs and provide better support to franchisees. McDonald’s recorded net income of $1.5 billion, or $1.90 per share, up from $1.4 billion, or $1.70 per share last year.

“We expect to see improved speed to market and decision-making as the U.S. becomes fit for purpose,” Easterbrook said. “And that better alignment enables us to provide a great experience for our customers and unlock the full potential of the plan.”

Part of this, Easterbrook said, is McDonald’s overarching strategy, known as the “Velocity Growth Plan,” which turns the dial on initiatives well beyond straightlined value—a stagnant positioning that sagged the brand before its recent run of positive results.

"We have taken share on the sales level for 72 of the last 78 weeks in the U.S. and that's a trend we expect to continue. We want to get the traffic share back as well. So we want to be greedy." — Steve Easterbrook, McDonald's CEO.

McDonald’s made some significant progress on those platforms in Q2, with Easterbook calling the brand’s rapid evolution to “Experience of the Future,” stores “quite remarkable.” McDonald’s converted 1,300 restaurants to the design, known for its kiosks, in a 90-day Q2 stretch. That measures to roughly 10 additional restaurants every day. To date, McDonald’s has more than 5,000 updated units, north of one-third of its U.S. footprint.

“When it's a full modernization [Experience of the Future] here in the U.S., we're getting mid-single digit sales uplifts,” Easterbrook said. “When it's just adding the EOTF elements on modernized restaurant, we're still getting 1 to 2 percent uplift.”

On the delivery front, Easterbrook said the chain is “moving at a pace that is unprecedented in the McDonald’s system.”

Flip the calendar back to last July and McDonald’s offered delivery in about 7,800 restaurants. Today, there are 13,000-plus units across 60 markets on six continents offering the service. In some top markets, delivery is representing as much as 10 percent of sales, Easterbrook said.

“Delivery requires virtually no additional investment and is tremendously effective in bringing profitable and incremental guest count. We're continuing to see delivery orders of about double the size of the standard restaurant average check,” he said.

The key centers on driving awareness. When McDonald’s held its McDelivery Day this July, the brand saw its highest number of delivery transactions ever in a single day stateside.

Another evolving McDonald’s initiative is the fresh beef Quarter Pounders. Easterbook said awareness levels at launch were around 80 percent, and McDonald’s has been able to take share thanks to solid consumer sentiment. However, it has introduced operational challenges. It’s added a few seconds to service time, a pronounced issue in the drive thru. “We're looking at other things we can do to simplify the operation to help bring our service times down,” Easterbook said.

McDonald’s addressed its recent food-safety salad issues. The company had to find a new supplier at roughly 3,000 Midwest restaurants due to a cyclospora outbreak health officials tied to McDonald’s. Federal officials pegged the number of affected people at 286 in 15 states who fell ill from McDonald’s. Eleven were hospitalized, according to the Food and Drug Administration. The locations all received new salad ingredients earlier this week.

“Food safety and the customer's well-being is our absolute No. 1 priority, first and foremost,” Easterbrook said. “… It's something you don't want to be associated with, so we take it very seriously."

McDonald’s breakfast business, which has been a topic of discussion in recent calls and represents about 25 percent of sales, is something the brand remains active in fixing. It’s not a product concern as much as a daypart one. Easterbrook said McDonald’s believes it can regain share through local market activity.

“The tastes and wants of consumers around the U.S. are pretty vastly different at that breakfast daypart,” he said. “Some are: coffee-led markets that are food supported; others, food-led markets that are beverage supported. So we believe putting the power back into the local co-ops is the right way to go.”

“We have taken share on the sales level for 72 of the last 78 weeks in the U.S. and that's a trend we expect to continue. We want to get the traffic share back as well. So we want to be greedy. We plan to be greedy and win on both sales and guest count and that's where we're galvanizing ourselves around.”