Embarking on a transformative maneuver, McDonald's Corp. (MCD, Financial) is looking to reignite its growth by enhancing the customer experience.
Armed with the revised "Accelerating the Arches" strategy, which was announced in January, the fast-food giant is strategically leveraging digital channels and revamping its menu to cater to evolving consumer preferences.
Strategic awakening
McDonald's is implementing a strategic awakening with the strategy, aiming to drive growth and enhance the customer experience. For instance, McDonald's and Glovo's strategic partnership is a vital move that aligns with its focus on delivery in driving the business forward. By expanding their existing agreement, both companies aim to enhance the customer experience by providing the convenience of McDelivery through the Glovo platform.
With Glovo operating in 25 countries and over 1,500 cities, the partnership may lead to growth and market expansion opportunities. By collaborating with the food delivery service, McDonald's can utilize its technological capabilities and extensive network to ensure a seamless delivery experience for customers and capitalize on growing demand.
Source: McDonald’s Aspiration Workshop
For growth, McDonald's is maximizing marketing. The company plans to invest in new, culturally relevant approaches to communicate its brand story, food and purpose effectively. It includes campaigns like the Famous Orders platform, the FIFA World Cup and the Raise Your Arches campaign. McDonald's is concentrating on value creation at every tier of its menu, particularly in the uncertain economic environment. Through engaging and personalized campaigns, its marketing strategy may attract and retain customers, especially among the younger generations.
Additionally, enrichment of the core menu may serve as another growth factor for McDonald's. It plans to boost customer demand for familiar and iconic products like the Big Mac, Chicken McNuggets and the McFlurry. The company aims to improve these classics and sees a significant opportunity with coffee to leverage the McCafé brand. The company may successfully address consumer preferences by focusing on both core icons and scaling emerging offerings like the McSpicy and McCrispy Chicken Sandwiches.
Further, McDonald's plans to double down on the four Ds: digital, delivery, drive thru and restaurant development. It recognizes the importance of digital channels and a personalized and convenient customer experience. For the objective, its "MyMcDonald's" digital experience may serve as a growth engine.
McDonald's drive-thru locations remain a competitive advantage, along with successful loyalty programs and partnerships with delivery platforms like UberEats and DoorDash (DASH, Financial). The company expects digital channels to continue to drive significant sales growth, and it plans to build on that strength by including drive-thru options in new locations. Further, McDonald's may benefit from the accelerated pace of global restaurant openings, focusing on exploring new formats and opportunities for growth.
Source: McDonald's supplemental information
Looking ahead, McDonald's provided an outlook for 2023. The company expects net restaurant unit expansion to increase sales, focusing on opening approximately 1,900 new restaurant units globally. It also anticipates the operating margin to be around 45% and plans to invest in capital expenditures of $2.2 billion to $2.4 billion, primarily directed toward new restaurant unit expansion.
McDonald's aims to achieve a free cash flow conversion rate greater than 90%, highlighting its commitment to generating strong cash flow and returning value to shareholders.
Forward orientation
One of the elements of McDonald's forward orientation is the board refreshment strategy. With the election of new independent directors, McDonald's focuses on bringing in diverse expertise and perspectives. The new directors may integrate more expertise in digital innovation, brand strategy, sustainabilit, and real estate, aligning with the company's strategic efforts for growth. In recent years, McDonald's has added new board members such as Tony Capuano, Kareem Daniel, Jennifer Taubert and Amy Weaver, each contributing a mix of skills and perspectives.
At the product level, McDonald's is adopting a specific antibiotic policy in line with World Health Organization guidelines. Failure to address antimicrobial resistance can severely affect its market value and brand image. Also, considering the increasing concerns about AMR and the potential $100 trillion in lost global production by 2050, it is in McDonald's best interest to proactively address the issue. Implementing responsible policies throughout its supply chain may benefit the company in attaining its strategic objectives.
Notably, the resilience of the McDonald's brand and its ability to drive growth are also crucial elements in its forward orientation. Despite challenges such as inflation, supply chain issues, labor availability and geopolitical tensions, the company is implementing organizational shifts to leverage its scale more effectively, reduce silos and drive innovation to support its long-term financial performance. This can be observed in its first-quarter results.
Source: First-quarter 2023 results
In line with the changing consumer landscape, McDonald's has embraced digital transformation, integrating digital and physical experiences. The company has introduced initiatives such as the MyMcDonald's Rewards program, which has gained significant traction with approximately 50 million members across major markets. Additionally, McDonald's has prioritized digital transactions, with 40% occurring digitally.
From a financial perspective, the company has a strong balance sheet and a history of returning capital to shareholders through dividends. It has consistently increased dividends for 46 consecutive years and plans to continue this practice. Interestingly, there are no plans for changes to dividend practices or stock splits, as the focus remains on driving shareholder value. Fundamentally, restaurant margins are increasing year overyear at the ground level, which may support the dividend yield and stock price appreciation over the long term.
Source: McDonald's annual report
Risks and downsides
A significant risk attached to the strategy is McDonald's failure to execute it successfully. Any failure will adversely impact its ability to capitalize on its global scale, iconic brand, local market presence, business performance and market share.
Investments in enhancing the customer experience, including technology integration and digital engagement, also carry risks. The investments, which are speculative as McDonald's focuses on improving service models, strengthening customer relationships and expanding delivery initiatives, may lead to different results. It may impact profitability, food quality and preference and customer satisfaction, leading to failure to generate the intended benefits.
McDonald's faces intense competition in the informal eating out segment. It requires rapid improvements to its products, developing new offerings, managing operations effectively, investing in technology and responding to competitors' actions. Any lagged response may shrink its market share considerably. Last but not least, there is a short-term risk of a downtrend in stock price as most of the recent insider activity is inclined towards the sell side.
Takeaway
In conclusion, McDonald's strategic awakening and forward orientation demonstrate a strong commitment to growth and customer satisfaction. With its "Accelerating the Arches" strategy, the company is leveraging partnerships, marketing initiatives, menu enhancements and digital channels to drive its success.
Strategic partnerships, such as with Glovo, position the company to tap into the growing demand for delivery services and expand its market reach. With a focus on innovation, resilience and customer-centricity, McDonald's has the potential to maintain its global position, boost market share and create value for shareholders.
