How McDonald’s Keeps Winning Over Its U.S. Customers

McDonald’s (NYSE:MCD) recently unveiled its Q1 earnings which saw its revenue increase by 7% and net income grow by 5%. The star of the show was not the emerging economies but the U.S. where comparable sales (or comp sales) grew 8.9%. International comp sales growth was tepid with European comp sales increasing 5% while the corresponding figure for APMEA (Asia Pacific, Middle East and Africa) was 5.5%. The ability to keep reinventing itself to appeal to consumers domestically as well as internationally is the reason why we think McDonald’s deserves a higher price than the current market price.

We look at what steps McDonald’s took that led to such impressive comp sales growth rates in the U.S. McDonald’s competes with Yum! Brands (NYSE:YUM), Subway, Starbucks (NASDAQ:SBUX), Wendy’s (NYSE:WEN), Chipotle Mexican Grill (NYSE:CMG), among many others.

See our complete analysis for MCD stock here

Most of the growth in the comp sales can be attributed to increases in customer traffic or average spend per customer since menu price increases were subdued in 2011. And since McDonald’s seems to be omnipresent in the U.S., achieving either of the two is a herculean task. This says a lot about the company’s ability to adapt itself to changing consumer demand and economic environment.

McDonald’s was able to increase customer traffic through a combination of factors.

1) Extend the Timings

First, extending the timing of its outlets or keeping them open for the whole day. More than 89% of McDonald’s outlets in the U.S. open by 5 a.m and 40% of them are open 24/7.

2) Adding New Menu Products

Second, the addition of new menu products help attract a greater number of customers. In 2011, the company launched Fruit & Mango oatmeal, Mango Pineapple Smoothies, Peppermint Mocha as well as other items. The new menu additions continued in 2012 with the introduction of Chicken McBites and the experimentation with bakery products. Such constant innovation is possible because McDonald’s spends a great deal on the research, development and testing of new products to ensure they appeal to American consumers.

3) Refurbishing/Reimaging Existing Restaurants

The third reason is the upgrades of its restaurants to include more comfortable seating, free Wi-Fi and even McTV. In fact, the company plans to spend half of its capital expenditure in 2012, estimated at a whopping $2.9 billion, to re-image and upgrade its existing U.S. restaurants to make them appear more upscale. This will help the company compete directly with the likes of Chipotle, Starbucks, etc., that fall into fast-casual or casual restaurant segment. Moreover, this will also help the company to some extent to cast off the stereotype of being a large scale, inexpensive burger serving restaurant chain and appeal to a wider range of consumers.

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