Edit
Financing

At McDonald’s, fewer restaurants and fewer customers

The company believes remodels and efforts to improve service times will get customers coming back.
Photograph courtesy of McDonald's Corp.

McDonald’s U.S. same-store sales rose 2.3% in the fourth quarter ended Dec. 31, the company said Wednesday, as the burger giant continued its relatively steady performance in recent years.

But that performance has somewhat hidden a stubborn trend: McDonald’s keeps losing customers.

The company’s comparable guest counts declined 2.2% last year. That was the fifth time in the past six years that the Chicago-based burger giant served fewer customers at existing locations—a period in which cumulative comparable guest counts declined by 12%.

That has come as the company has closed locations. McDonald’s shrunk by 122 locations in 2018, giving the company fewer than 14,000 restaurants for the first time since 2009. The company has shrunk unit count by 3% since it peaked at 14,350 restaurants in 2014.

“We want the customer to come back more often,” CEO Steve Easterbrook said on the company’s fourth quarter earnings call Wednesday.

McDonald's U.S. Same-Store Sales by Quarter:

To be sure, McDonald’s has grown total U.S. sales for four straight years. According to data from Restaurant Business sister company Technomic, total sales rose 2.4% in 2018 to $38.5 billion. Many of the closed locations, meanwhile, have come in places like Walmarts that were less beneficial to the company.

And a lot of the lost traffic in recent years has come in the form of value-centric customers who flocked to the chain during and after the recession for its Dollar Menu featuring McDoubles and McChicken sandwiches. As such, while McDonald’s has generated less traffic, the traffic it does have is more profitable.

But the reduction in traffic, particularly last year, has come despite an enormous effort on the part of the company and its executives to overhaul the chain and make it more attractive to customers at a time when the restaurant industry is essentially full.

Overall growth in the fast-food market is “incredibly muted,” Easterbrook said, and “any traffic gains have to come at the expense of someone else. We’re not expecting any tailwinds in the form of broader growth” in the informal eating out category.

McDonald's U.S. Locations:

McDonald’s and its franchisees are investing billions to quickly remodel restaurants and add self-order kiosks, digital menu boards and other amenities. Easterbrook called it “the most ambitious program” the company’s huge U.S. market has ever undertaken.

But frustration over certain elements of the remodels, as well as the continued decline in guest counts, has contributed to an uprising by the chain’s franchisees that began last fall.

The remodels have taken longer to finish than expected, and it’s taken longer for sales to return. CFO Kevin Ozan said that the company has implemented processes to “shorten downtime” and “accelerate recovery” to minimize the impact on the business.

Executives said that sales growth of restaurants that have kiosks in the U.S., about 7,500 at the end of 2018, have been in line with expectations. The company expects to be mostly complete with its remodel program by 2020, with about 1,000 locations taking advantage of an extension of the deadline in exchange for a lower company contribution.

And the company will remodel fewer restaurants this year: 2,000, versus the 4,500 it did in 2018.

“We believe our ability to invest in restaurants at a relatively quick pace helps us separate ourselves from the rest of the industry,” Ozan said on the earnings call. “That’s why we’re continuing to do that.”

The company also started serving fresh-beef Quarter Pounders last May. It has worked on a number of value efforts, including a $1 $2 $3 Dollar Menu that didn’t generate traffic as hoped. It also quickly added delivery at restaurants throughout the U.S.

Executives said Wednesday that delivery is generating nice, year-over-year growth at restaurants that have had the service that long. They also said about 70% of the sales from the service are “incremental,” which much of them coming during typically weak periods.

McDonald's Comparable Traffic:

Despite all of those efforts, McDonald’s competitors had largely caught up with the chain’s same-store sales performance by the end of 2018—the company’s performance was “flat” versus competitors in the period, while it outperformed other fast-food chains by 100 basis points for the year. “The QSR environment proved challenging,” Ozan said, noting “aggressive promotional activity” throughout the sector.

Company executives said that much of the traffic problems happened in the morning, which McDonald’s is addressing with some new menu items, such as Triple Breakfast Stacks introduced in November, along with more localized value offers.

But executives also said they are focusing heavily on improving speed, which is widely viewed as a contributor to the company’s traffic challenges in recent years. Easterbrook said that drive-thru service times have increased for five years, a trend the company brought to a stop last year.

The company has started adding digital screens in the drive-thru presenter window where food is handed to the customer. The screens provide real-time service times and help managers identify bottlenecks and address issues that might be hurting service.

The company also has a new tool to simplify the menu that helps determine the volume of certain menu items served, how difficult it is to prepare those items and their contribution to profits. That, Easterbrook said, should help the company simplify the menu with less impact on the customer. A simplified menu helps improve speed.

“We have a collective resolve that service times” need to improve, Easterbrook said. “We will not accept them getting any longer.”

Trending

More from our partners