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Are remodels hurting McDonald’s sales?

An analyst suggests that keeping restaurants offline while they add kiosks is hurting same-store sales, says RB’s The Bottom Line.
Photograph by Jonathan Maze

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Over the weekend, Stifel analyst Chris O’Cull threw some cold water on the idea that remodels will provide a short-term boost to same-store sales at McDonald’s.

In a note on Sunday, O’Cull wrote that remodels will create “near-term pain” for the Chicago-based burger giant as it overhauls some 7,000 restaurants this year, with plans to complete the program by the end of next year.

By disrupting or closing restaurants for a time while they get remodeled, the company is losing more sales than it is gaining thus far from the sales lift the newly spruced-up buildings are generating.

“The negative impact from temporarily closing restaurants and a slow post-remodel recovery time has led to a greater drag than we expected,” O’Cull wrote.

Closing restaurants for remodels hurt same-store sales by 100 basis points in the second quarter ended June 30, for instance.

The sales lift from newly remodeled restaurants, however, lifted sales by just 25 basis points. That’s a net negative of 0.75%, meaning that McDonald’s same-store sales would have risen 3.35% in the quarter, as opposed to 2.6%.

What’s more, he believes the real impact on the company’s same-store sales won’t take hold until 2020, after the remodels are largely complete. He said that investors’ expectations for same-store sales growth from the remodels later this year or into 2018 are “ambitious.”

McDonald’s and its franchisees are investing $6 billion to remodel the vast majority of the system in the U.S. under the “Experience of the Future” design, which features kiosks and table service and is designed to improve throughput.

But the Stifel warning, which led to a 1.5% decline in McDonald’s stock on Monday, highlights one of the challenges of such remodels, which is that sales improvement from the spruced-up locations comes with a short-term price in the form of closed locations.

Many restaurants have to shut down for a time while the work is done, though many locations have kept their drive-thrus open. Yet the disruption in service keeps away some customers who might think the restaurant is closed or don’t want to navigate their way through construction equipment.

The photo above, for instance, is of a drive-thru in suburban Minneapolis in the spring that was in the process of a remodel.

Theoretically, however, the remodeled restaurants are supposed to generate same-store sales from customers curious about the new kiosks and service models.

Customers, who have some time with the kiosks, tend to order more at a time, which should pull up same-store sales. That might be happening—McDonald’s is generating its same-store sales through higher average checks, rather than traffic, meaning customers are ordering more. The kiosks could be contributing to that.

But that contribution is apparently slower than expected, at least thus far. And at the moment, McDonald’s is doing a lot more remodels than it has remodeled locations.

That means remodels should be a net negative at least until the gap narrows and finally the number of restaurants remodeled surpasses the number of restaurants being remodeled.

“The remodels should create a halo for the entire brand once the program hits critical mass later in 2019,” O’Cull said, “but probably not provide a meaningful boost until 2020.”

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