McDonald’s understands the major change in how customers order and receive their meals.
Look no further than the brand’s accelerating digital sales. The chain’s MyMcDonald’s Rewards program is now in more than 50 markets across the world, pushing digital mix in the top six markets to nearly 40 percent of systemwide sales. Signups are still growing in the high-single digits, and a large number are engaged—more than 52 million were active in the past 90 days. During Q2, the U.S. business deployed an enhanced ordering process via the app to deliver a faster experience. It’s still early, but there’s been elevated app sales, more customer satisfaction, and better service times.
The shift has serious implications for development. Over the next several years McDonald’s will primarily focus on traditional stores, but greater experimentation with slimmer prototypes is coming.
The company’s business venture team is developing a new design called “CosMc’s,” which will be “a small format concept with all the DNA of McDonald’s, but its own unique personality,” said CEO Chris Kempczinski. The name comes from CosMc, an alien mascot that appeared in commercials during the 1980s and 1990s.
The restaurant will be tested in a handful of sites in limited geography beginning early next year. The company will provide more information on the design during Investor Day near the end of 2023.
“How do we bring new concepts that open up real estate opportunities that under a traditional model would not necessarily be available to us?” Kempczinski asked rhetorically during the brand’s Q2 earnings call. “A big reason that we can now look at those is because of the growth that’s happened with the digital and delivery where you don’t necessarily need the big dining rooms that you needed in our traditional restaurant. So you’re now able to look at real estate sites that previously would have been sort of off-limits to us. Those become opportunities.”
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Kempczinski expects to take these learnings and gain a better perspective of what McDonald’s new unit potential is over the next four to five years. It won’t be something that becomes material in 2024 or 2025, but some real benefits could happen by 2026 and beyond.
There have been some projects completed on this front. Last last year, McDonald’s opened a small-format test restaurant in Forth Worth, Texas. The unit has an order-ahead drive-thru lane where customers receive orders via a food and beverage conveyor, and it’s equipped with technology that allows workers to prepare orders when guests get closer to the store. Additionally, there’s a delivery pickup room for couriers to retrieve orders, kiosks that accept cash and credit, and a pickup shelf. Outside, McDonald’s built several parking spaces dedicated to curbside order pickup alongside designated spots for delivery drivers.
Then there’s China, where digital mixes 90 percent. Some restaurants with high in-store traffic use lockers for couriers to pick up food without entering the dining room.
“We’re always testing and learning new ways to meet the needs of our customers,” Kempczinski said.
Numerous quick-service chains tested smaller formats and drive-thru-only prototypes amid the pandemic as customers flocked to the channel—a migration that doesn’t appear to be going away. Chick-fil-A, Chipotle, Jack in the Box, and Captain D’s, are some of the bigger names that have gone this route.
McDonald’s—the largest restaurant company in the world—finished Q2 with 40,801 stores globally. That included 13,445 in the U.S., 10,137 in International Operated Markets, and 17,219 in International Developmental Licensed Markets.
Prioritization of development is a distinct change for McDonald’s as the past several years have mostly been around reinvestment and reimaging. The chain’s U.S. market saw net unit growth in 2022, which hadn’t happened in eight years. It’s the same situation internationally; Kempczinski said the growth in many large International Operated Markets (i.e. U.K., France, Canada, Germany, Australia) “has been pretty anemic compared to what we think is the opportunity.”
Consistently high same-store sales figures are justifying further development. In the second quarter, U.S. comps rose 10.3 percent, rolling over a 3.7 percent increase in 2022. International Operated Markets lifted 11.9 percent (on top of 13 percent last year) and International Developmental Licensed Markets grew 14 percent (on top of 16 percent last year).
The financial success is why McDonald’s decided to alter its multi-year Accelerating the Arches strategy. Previously, the blueprint involved the 3Ds—delivery, digital, and drive-thru. But to kick off 2023, the burger giant added development.
The chain is in the process of a “top-down and bottom-up look at what is the development opportunity that exists in each of those markets and how do we go exploit that,” Kempczinski said. Using the U.S. as an example, the CEO noted that McDonald’s footprint reflects what the country’s population looked like 20-30 years ago.
“Imagine the amount of shifts that have happened, people moving to the South to the Southeast—that isn’t reflecting on our footprint,” Kempczinski said. “Our footprint reflects what the population looks like probably 20 or 30 years ago. So you end up finding there’s a number of places around the U.S. where we are significantly underdeveloped relative to where the population exists today. That opens up for us a whole bunch of development opportunities for us to go after.”
McDonald’s attributed strong Q2 sales to promotions around the Grimace Birthday Meal, which garnered more than 3 billion views on TikTok. It featured a purple milkshake inspired by the character’s recognizable color, along with a choice of a Big Mac or 10-piece Chicken McNuggets and fries. CFO Ian Borden described it as “One of our most socially engaging campaigns of all time with millions of reactions on our social media posts, a true demonstration of how the power of our brand emerges in organic and creative ways in our fans.”
Kempczinski said there hasn’t been a major change in U.S. consumer sentiment, despite macroeconomic headwinds. McDonald’s still isn’t back to 2019, but it’s performing well with incomes under $100,000, which suggests it’s getting trade-down from casual dining, the CEO said. The brand is also seeing stability with incomes under $45,000; with this group, there’s been a decrease in order size, offset by strong traffic.
The chain sees enough positive traffic that it hasn’t considered switching its value platform back to the Dollar Menu.
“I think net net, when you look at all of it, there is certainly concern with the U.S. consumer that shows up in their sentiment,” Kempczinski said. ” … I think our value positioning in the market has put us into a good position to be able to weather that and continue to drive the share gains that you’re seeing.”
