These Three Things Matter Most For McDonald’s

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McDonald’s (NYSE:MCD) introduced a turnaround plan in May 2015, which included financial plans and restructuring of the company’s business worldwide, after a disappointing Q1 earnings report. With same store sales declining every quarter and competitors gaining market share, McDonald’s needed to innovate and correct its mistakes to capture lost market share. The Q3 2015 results have shown signs of improvement and recovery with a 4% increase in global comparable sales. Focus on franchisee growth, international markets, and a healthier menu are three things that can help drive growth for McDonald’s.

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Increase In The Number Of Franchisees

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McDonald’s turnaround plan includes re-franchising 3,500 restaurants by the end of 2018, making the company 90% franchised. Franchise rent & fees and royalties are the two main sources of revenue for the company. Although revenues from the franchisee model are lower than those from company operated restaurants, profit margins are almost four fold since the franchise model does not involve extra operational costs. This model is working well for McDonald’s. The target to make the company 90% franchised from the current 80% level should have a positive impact on its valuation.

Improvement In The Quality Of Ingredients

The U.S. market accounts for 40% of McDonald’s operating income and customers in this region are leaning towards healthier menu options. They are valuing better quality of meat (antibiotic free, cage free), fresher and organic food items being offered by fast casual chains, which are gaining market share. In order to improve comparable sales in this region, McDonald’s is focusing on adapting to the changing needs of its customers. The company took the first step in this direction in September 2015 by announcing that its 16,000 restaurants will fully transition to cage free eggs in the next 10 years.

McDonald’s had a 30% market share in the breakfast segment in the U.S., as of the end of 2014,  and constantly adds new items to its breakfast menu. Competition in this space is stiff with players such as Dunkin’ Brands and Starbucks stepping up. Focus on quality ingredients and healthier menu options will be key in driving same store sales in the U.S.

Regaining Confidence In Asian Markets

The Japan meat scandal in July 2014 impacted McDonald’s sales in the entire Asian region, with same store sales declining significantly. With 3,100 restaurants, Japan is the second largest market for the company after the U.S. Restoring customer confidence in terms of food quality and hygiene is key for McDonald’s growth in this market, which accounts for nearly a quarter of its revenues. The Q3 results showed comparable store sales growth of nearly 30% in China. This is a strong sign of recovery, and an improvement in sales and margins in China as well as other international markets such as the U.K. and Australia will drive growth for McDonald’s.

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