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Is McDonald’s doing too much?

Many initiatives could make things more complex, but it isn’t hurting the brand yet, says RB's The Bottom Line.

The Bottom Line

In 2017, McDonald’s was the top-performing restaurant stock on Wall Street largely because investors liked its many initiatives: a newfangled dollar menu, fresh beef, kiosk installation, delivery, a mobile app with curbside service and a new coffee program.

In 2018, McDonald’s is coming under fire for doing too much.

Earlier this month, Bloomberg talked with employees of the chain’s restaurants, who said the company’s kiosks and growing complexity led them to depart for other jobs—a concern at a time when unemployment is low and finding good workers is a challenge.

Jefferies analyst Andy Barish seemed to acknowledge this challenge in a note last week when he said that McDonald’s working on “many new initiatives at the same time” presents some “operational risks.”

McDonald’s numerous initiatives are a definite risk, perhaps the biggest facing the chain this year as it seeks to build on recent momentum.

The burger and breakfast giant was a complicated animal back in 2015 when Steve Easterbrook took over as CEO with at least some hope that its massive menu would be simplified to some degree, along with its processes.

Instead, it has only become more complicated. Consider the company’s Grand Mac, its extra-large Big Mac, made with two sixth-of-a-pound patties—which are not otherwise on McDonald’s menu. An additional patty adds an item and makes things that much more complicated. Why not just use the already-there quarter-pound patty and charge more?

Taking that complicated menu and adding to it all-day breakfast, new coffee drinks and new service models in delivery and curbside, along with the training associated with a shift to fresh beef, only risks complicating matters further.

Complexity matters. McDonald’s has refranchised many of its company units, and so it relies on franchisees to execute its initiatives.

Franchisees are frequently better operators, but the complexity could stress those operators and hurt service. Low unemployment makes the labor pool more of a challenge because higher-quality workers have better options.

With the restaurant industry saturated with locations and same-store sales still generally weak overall, customers could opt for other restaurants if they don’t like the service at McDonald’s.

And the burger market is a lot more competitive now than it was just five years ago.

All that said, it’s still too early to determine whether all of these initiatives are stressing the company, its franchisees and employees. It’s clearly not hurting sales yet.

Indeed, McDonald’s appears to be making progress in its relationship with customers, even since late last year.

For this, we return to Barish’s note from last week, in which he mentioned those operational risks.

In the note, Barish said that McDonald’s is actually making progress in its reputation with consumers, at least based on Jefferies’ review of social media.

The review was enough for Barish to maintain his prediction that the chain’s same-store sales will grow 3% in the first three months of 2018; other analysts have been lowering their predictions amid concerns that the $1 $2 $3 Dollar Menu isn’t resonating with consumers.

Barish said that McDonald’s “star rating” with customers, which reflects guest satisfaction, has improved so far this year, versus the last quarter of 2017. If these initiatives are truly stressing operators, it’s not showing up in the way consumers perceive the chain.

It’s also notable that McDonald’s has extensively tested many of these initiatives. It’s difficult to imagine that the company would be adding fresh beef—or kiosks, for that matter—this year if customers hadn't responded positively.

“It’s one of the best innovations we’ve done on large sandwiches in a long time,” said Joe Jasper, a 20-unit operator in Fort Worth, Texas, who was an early tester of fresh beef.

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