Here’s How Better Use Of Technology Can Drive Sales For McDonald’s
A menu which suits changing customer preferences and focuses on technology to improve restaurant efficiency are the two key pillars of McDonald’s (NYSE:MCD) transformation. The company is likely to launch its digital ordering platform later this year and is upgrading its restaurants with “experience of the future” which includes self-serve kiosks. While the company has clarified that these kiosks will not lead to layoffs and the employees will be moved to other areas, these technology initiatives are likely to improve restaurant efficiency which can fuel sales growth. As the company moves toward fresh beef in its quarter pound burgers, early research shows that these burgers will take 1 minute longer to make, impacting the efficiency of the restaurants. It is essential for the company to take other measures to improve the efficiency since speed is one of the key strengths of McDonald’s. A digital ordering platform and kiosks at restaurants can reduce the time taken for ordering a meal and compensate for the extra time taken to make a fresh burger. As fast food restaurants compete on both efficiency and quality of a meal, we believe effective use of technology will ensure that McDonald’s retains its competitive edge in the long term.
Efficient Service Can Boost Comparable Sales
According to analysts at Cowen, McDonald’s technology efforts will start showing results in 2018 and can improve the comparable sales of the company by nearly 100 basis points. Several initiatives taken by the company such as menu innovations, door delivery service, and more importantly, an efficient platform for ordering at its restaurants and through mobile phones, is likely to drive this growth. As the company balances speed of service with healthier and fresh menu items, it is likely to see an uptick in sales.
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According to our estimates, the annual customers at a McDonald’s restaurant will remain steady at around 600,000 over our forecast period. This number has declined from a high of 730,000 to 609,000 between 2012 and 2017. However, through the technology initiatives if this number increases steadily over our forecast period and reaches around 650,000 by 2023, there can be a nearly 10% upside to our price estimate.
While technology can help McDonald’s to become efficient and serve fresh food (which takes slightly longer to make), at the same time, there are challenges associated with the platform. Starbucks, which pioneered the mobile order and pay system, is facing congestion problems due to the overwhelming orders placed via this platform. This indicates that companies also need to gear up their employees and restaurant design to meet the rush of orders via the new platform and McDonald’s will have to ensure that it is prepared to serve the high volume of orders via the new digital platform without similar hurdles. Technology is likely to aid the company in the coming years, however, effective execution from a dedicated team of employees is likely to be a key growth factor.
Our price estimate for McDonald’s is currently nearly 13% lower that its market price and our EPS (earning per share) estimate for the company is lower than the consensus figure. We will be updating our model after the Q2 2017 earnings which could lead to a revision in the EPS and our price estimate.
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