McDonald’s Drives Sales Growth with New Menu Items, Restaurant Upgrades

+26.92%
Upside
234
Market
297
Trefis
MCD: McDonald's logo
MCD
McDonald's

McDonald’s (NYSE:MCD) continued with its strong performance registering 6.7% growth in the global same-store sales in January 2012. [1] For 2011, its global comparable sales growth stood at 5.6%. We analyze just how important comparable sales are for McDonald’s and what the company is doing to maintain growth. The company competes with Yum! Brands (NYSE:YUM), Subway, Starbucks (NASDAQ:SBUX), Wendy’s (NYSE:WEN), Chipotle Mexican Grill (NYSE:CMG), among many others. We have a Trefis price estimate of $100 for McDonald’s, which is in line with the market price.

See our complete analysis for MCD stock here

Global Comparable Sales Figures Are Important

McDonald’s restaurants are either company-operated or franchised. For company-operated restaurants, the entire revenues earned are added to the company’s income statement. However, for a franchised restaurant, McDonald’s earns its revenues as a fixed percentage of sales. Hence, higher the sales from a franchised restaurant, the more revenue McDonald’s earns from that particular restaurant.

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Expenses, on the other hand, remain more or less constant for a franchised restaurant, from McDonald’s stand point. Hence the incremental sales only add to McDonald’s earnings and can support margin growth.

What is McDonald’s Doing About It?

McDonald’s plans to spend a whopping $2.9 billion on capital expenditure in 2012, up from $2.6 billion in 2011. Half of this amount will be used for opening about 1,300 new restaurants and the other half will be for refurbishing 2,400 of its existing restaurants. The company will provide more comfortable seating, introduce McTV and expand its free Wi-Fi service in order to appeal to a wider range of audience. By doing so, McDonald’s hopes to attract customers who will stay longer and spend more and shed its image of being primarily an affordable, fast food option for young people.

Remodeling helps in creating the perception that the restaurant offers higher quality food. This helps Quick Service Restaurants (QSRs) such as McDonald’s compete directly with the likes of Chipotle, Starbucks, etc., that fall into fast-casual or casual segment.

McDonald’s has expanded its premium offerings including the McCafe brand that offers higher margins. The McCafe outlets generate 15% more revenues on an average, and the company plans to expand the brand to another 150 restaurants in Europe in 2012. After adding Peppermint Mocha to its menu in 2011, the company will launch Cherry Berry Chiller later this year.

Similarly, the company will introduce Fruit & Mango oatmeal after the successful introduction of oatmeal in 2011. McDonald’s also launched the Angus burgers in Brazil in November 2011.

By improving the decor and offering free amenities like Wi-Fi, the company hopes to attract new customers, who would otherwise be hesitant to visit the restaurant due to the company’s stereotyped image. At the same time, McDonald’s will earn more loyalty from its existing customers who can enjoy a more relaxed environment without having to pay higher prices on the core menu.

Understand How a Company’s Products Impact its Stock Price at Trefis

Notes:
  1. McDonald’s January Global Same-Store Sales Up 6.7%; Beats View, Fox Business, 8 February, 2012 []