Here’s Why 2018 Could Be A Growth Year For McDonald’s

by Trefis Team
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Over the past two years, McDonald’s (NYSE:MCD) has been working aggressively on several initiatives to shed its image of an “unhealthy, junk food” destination and customize its offerings to suit changing customer requirements. These changes have started showing results, with positive comparable sales leading to a growth in profits. The company registered a nearly 45% growth in its stock price in 2017. We expect this momentum to continue in 2018 as the company launches several new initiatives this year to attract both its value conscious customers and those looking for healthy alternatives.

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  1. Dollar Menu: McDonald’s began 2018 by launching its $1, $2, $3 menu aimed toward its value conscious customers. Earlier a similar program was discontinued in 2014 since it impacted margins adversely, however this time around McDonald’s is confident that other cost efficiencies (around marketing and lower fixed costs due to higher traffic) will ensure that margins do not decline due to this value platform. The company’s promotions in 2017 around $1 meals have been successful and this menu is likely to drive growth for the company in 2018. (Read Here’s How “Value Meals” Can Impact McDonald’s Stock Price).
  2.  Innovative Products: McDonald’s efforts toward new menu items designed to meet customer requirements will continue in 2018 attracting curious customers and those looking for specific meals. Recently the company launched an exclusive beverage – MIX TM by Sprite Tropic Berry which debuted in all of its New York City restaurants. All McDonald’s restaurants in the U.S. are likely to serve this drink by the summer of 2018. This exclusive to McDonald’s drink combines the flavors of lemon-lime and fruits aimed towards attracting customers looking for caffeine-free natural drinks.  In December 2017 the company launched a “Vegan Burger” in Sweden and Finland after successful trials in these countries. This product is aimed towards ensuring that most customers visiting the company’s restaurants have “something in their menu” to try out.
  3. Fresh Beef Burgers: While McDonald’s is scheduled to launch its fresh beef quarter pound burgers in the middle of 2018, the company recently started testing another fresh beef burger – the ‘Archburger’. The company is currently testing this new item in limited outlets to gather feedback. Fresh beef burgers are likely to be “game changers” for McDonald’s as these could attract customers looking for fresh and healthier burgers and increase the average spend per customer.
  4. Technology Initiatives: McDonald’s is revamping its stores to create “Experience Of The Future” restaurants which will have self-serve kiosks and table service. The company’s mobile ordering and payment system continues to expand and McDonald’s is also effectively using the data captured via this platform for personalized marketing and customizations. Effective use of technology is another key growth factor for McDonald’s in 2018.

The above initiatives, along with the company’s refranchising efforts, are likely to impact its profitability positively in 2018.

Our division-wise projections for McDonald’s EBITDA margin can be viewed here. An accelerated growth in this margin can lead to an upside to our price estimate for McDonald’s which is currently at $157 (nearly 10% lower than its market price). 2018 is likely to be another stellar year for McDonald’s as the company reaps the benefits of its several innovative initiatives.

 

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