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McDonald's (MCD)

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WHAT HAS CHANGED?

Latest Earnings

For FY 2019, The company's revenue was recorded at $21.1 billion, nearly flat compared to previous year (up 3% in constant currencies). The Company saw an increase in Global comparable sales by 5.9% demonstrated broad-based strength with the International Operated segment increase of 6.1%, the U.S. increase of 5%, and the International Developmental Licensed segment increase of 7.2%. The diluted earnings were recorded at $7.88, up by 5% (7% in constant currencies). Further, Systemwide sales have increased by (4% in constant currencies) and Consolidated operating income increased 3% (increased 6% in constant currencies).

Value Meals Drove Growth In 2018

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. A higher number of items per order for $1, $2, $3 Dollar Menu transactions and positively impacted the results in FY 2018. Moreover, the company also introduced two for $4 breakfast in mid-March, which makes MCD more competitive in the breakfast daypart, helping ease the soft morning sales.

Technology Initiatives

McDonald’s is revamping its stores to create “Experience Of The Future” (EOTF) restaurants which will have self-serve kiosks and table service. The company’s mobile ordering and payment system continues to expand (in 20,000 restaurants currently) and McDonald’s is also effectively using the data captured via this platform for personalized marketing and customizations. MCD has also introduced delivery in 11,500 restaurants, through its partnership with UberEats. CFO Kevin Ozan has stated that the delivery check size is generally one-and-a-half to two times the in-store check. In a number of its top markets, delivery has increased to form roughly 10% of the total sales. Consequently, an effective use of technology is another key growth factor for McDonald’s in 2018, as it can drive the average check higher. The company expects EOTF project to be substantially complete by 2020.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of McDonald's value that present opportunities for upside or downside to the current Trefis price estimate:

Average Revenue Per U.S. Restaurant: Historically, the Average Revenue per restaurant (both company-owned and franchised) has increased and as the company focuses on a combination of value and gourmet products, revenue per restaurant is likely to increase with higher ticket price. Further increasing guest count with higher comparable sales is likely to drive this metric further over our forecast period.

Number of franchise restaurants in high-growth markets: McDonald's is working towards a goal of being a 95% franchised entity and growth in the number of franchised restaurants is improving profitability. Further, as the company expands an adds more restaurants, systemwide sales are likely to grow.

BUSINESS SUMMARY

McDonald's owns and franchises its restaurants all over the world. Of the 37,855 restaurants in 120 countries at the end of December 31, 2018, 35,085 were operated by franchisees and 2,770 were operated by the company

McDonald’s essentially offers a uniform menu, though with minor variations to suit the local taste. A typical McDonald’s menu includes burgers, sandwiches, salads, snacks, breakfast sandwiches (McMuffins), beverages (soft drinks, coffee, milk shakes, juices), and desserts (ice cream, pies, smoothies).

McDonald's competes primarily with Wendy's and Burger King in the hamburger fast food category. However, in the overall fast food industry, McDonald's is the market leader with 22% market share followed by Yum! Brands and Subway.

SOURCES OF VALUE

McDonald's classifies its operations into the following four segments:

U.S. International Lead Markets High Growth Markets Foundation Markets and Corporate

We believe, the U.S. and International Lead Markets are the key sources of value for the company as it captures the growth in China and provides value for its customers in the U.S.

KEY TRENDS

McCafe gives McDonald's a strong presence in the specialty coffee segment

McCafe represents McDonald's foray into the high-margin caffeinated beverages market dominated by premium coffee chain Starbucks. McDonald's has been able to keep the prices competitive and margins healthy due to its excellent store network, its marketing muscle, and a highly efficient supply chain. McCafe's menu has been extended to more than coffee and now includes fruit smoothies, mocha, and chocolate shakes.

Competition among the top fast food chains to intensify in the breakfast segment

The breakfast market is proving to be a profitable segment especially in the U.S. McDonald's is the dominant player in the breakfast segment with a market share of over 30%. McDonald's ensures new items are added to the breakfast menu regularly. However, it now faces serious competition as a number of rivals such as Dunkin' Brands, Restaurant Brands International, Taco Bell, and Starbucks have stepped up their game in the breakfast segment. Starbucks is in the process of reinvigorating its breakfast menu with the help of baked goodies launched under the La Boulange brand. Restaurant Brands International houses two well-renowned brands: Burger King and Tim Hortons, both of which are already a strong presence in the breakfast market. Dunkin' Donuts has also revamped its breakfast menu to cater to the needs of its customers.

Store Redesign, Value Meals To Drive Growth

McDonald's is in the process of converting its stores into "Experience Of The Future" restaurants, providing technological convenience to its customers. The company's focus on balancing its innovative gourmet offerings to attract millennials with its value focus to retain existing customers is likely to drive growth in the future.

Recent Trefis Articles

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