McDonald's to invest $6B in its U.S. business

The company plans to speed up addition of its kiosks, thanks in part to tax reform.

McDonald’s is speeding the overhaul of its U.S. restaurants in the next two years, with plans to invest $6 billion along with its franchisees to add kiosks and remodel locations.

Speaking on the company’s fourth quarter earnings call Tuesday, McDonald’s executives said that lower taxes, thanks to tax reform, and the overall momentum of the business led the company to finish remodels of its domestic restaurants ahead of schedule.

“This is a massive undertaking,” CEO Steve Easterbrook said on the call. “But it demonstrates our confidence in the future of the business.”

About 3,000 of McDonald’s 14,000 U.S. locations have been remodeled in the company’s “Experience of the Future” design, which features new decor and self-order kiosks. That’s the design the company wants for all of its restaurants going forward.

The company now plans to convert another 4,000 locations by the end of the year and expects to convert additional locations next year.

McDonald’s pays for 55% of the cost of the remodel, with franchisees paying for the rest. Speaking on the call, executives said that franchisees’ cash flow is “near record levels,” which provides a good opportunity to make the investments now—especially given the benefits operators and the company are receiving from tax reform.

“We’ve taken the opportunity with the momentum we have … to effectively just pull this forward,” CFO Kevin Ozan said on the company’s earnings call.

McDonald’s same-store sales grew 4.5% in the U.S. in the fourth quarter ended Dec. 31. Traffic rose 1% last year, the first increase since 2012.

The company believes that remodeling the locations and adding the kiosks will improve customer perception while speeding service, particularly at busier times. A third of the company’s more than 37,000 global locations have the kiosks.

“We know the brand perception improves when restaurants are much more modernized,” Easterbrook said.

Despite the investment, and McDonald’s performance, the company’s stock fell nearly 4% on Tuesday. Investors largely expected improving sales, especially after McDonald’s stock value rose 40% in 2017.

Using its scale

The investments are part of an overall strategy McDonald’s is using to take advantage of its immense size and scale to outdistance its competitors.

The company is using its cash flow to invest in the business this year, helping to overhaul its store base in a relatively short period. McDonald’s also aggressively added delivery and mobile order and pay last year.

“McDonald’s has a distinct scale advantage and significant potential,” Easterbrook said. “We’re leveraging the benefits to being part of the larger McDonald’s system.”

The company is also shifting more of its marketing from local areas to national, which Ozan said is more cost-effective while taking advantage of the company’s size and its “share of voice” in the restaurant industry.

These efforts appear to be working. McDonald’s 4.5% increase in U.S. same-store sales in the fourth quarter outdistanced its quick-service sandwich competitors by 430 basis points, executives said on the earnings call.

McDonald’s generated improving sales in part based on the performance of its Buttermilk Crispy Tenders as well as its McPick 2 for $5 menu and $1 drinks. The company is now shifting its value attention to a $1 $2 $3 Dollar Menu.

Executives believe that dollar menu should perform well this year. They believe it’s a vital strategy, given that the overall market for quick-service burgers isn’t expected to expand this year.

“It’s a market share fight,” Easterbrook said. “We don’t see any broader market share growth. We know we’re in a market share fight, and value is when the street fighting really hits.”

Early delivery returns

McDonald’s quickly added delivery, with Uber Eats, to 5,000 locations in 2017. Easterbrook said that delivery’s expansion in 2018 “won’t be at the same rate” as in 2017, given some of the limits to Uber Eats’ market.

Delivery “emerged as a meaningful contributor to sales in many of our largest markets,” Easterbrook said.

Delivery sales are typically one and a half to two times average at the company. In the U.S., the company’s average check is about $5.80. Those sales are “highly incremental,” meaning that the restaurants wouldn’t generate those sales without delivery.

These sales come with lower margins, because of the fees franchisees pay to have the food delivered. “The reality is, the vast proportion of this is incremental business,” Easterbrook said. “They have a lower margin, but it’s incremental dollars.”

He also believes the company has had “a little bit of a jump on the market,” having expanded its delivery faster than most of its competitors.

Fresh beef

Another strategy McDonald’s is planning for this year is fresh-beef Quarter Pounder burgers, made to order.

The company is “in the rollout stage” of expanding the offering. Fresh beef is now in 2,000 to 3,000 locations, with more restaurants getting fresh beef in phases over the next two to three months. The company is planning a national rollout in May or June.

Easterbrook said that restaurants “need diligence in operational training” to get grill teams familiar with the process, but once embedded, “crew members adapt” to the new process.

“Customers just love the taste of fresh beef,” Easterbrook said. “We’re getting unsolicited feedback” from customers over the improved taste of the product.

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