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McDonald’s perplexing traffic problem

The burger chain has lost 13% of its same-store customer count over the past seven years, even as store count has shrunk, says RB’s The Bottom Line.
McDonald's storefront
Photograph courtesy of McDonald's Corp.

the bottom line

McDonald’s fourth quarter results reflected some pretty strong numbers.

The burger giant reported 5.1% same-store sales growth in the last three months of 2019, buoyed by numerous efforts that encourage customers to pay more per transaction, including delivery, kiosks, new drive-thru technology and even promotional items such as Donut Sticks.

Yet it still lost customers. Traffic declined 1.9% for the full year, and though executives said there was some “sequential improvement” toward the end of 2019, it was too early to say whether it was a trend.

That’s been an industrywide problem, to be sure. There are too many restaurants and not enough customers. That has translated into bad overall traffic. “Sluggish industry traffic growth and unit expansion continue to fuel an aggressive battle for market share,” CFO Kevin Ozan said on McDonald’s fourth quarter earnings call Wednesday.

For McDonald’s, however, this has been a yearslong problem that has now spanned multiple chief executives and numerous strategies. The Chicago-based burger giant’s same-store traffic in its biggest global market has fallen six of the past seven years.

McDonald's U.S. guest counts

Source: SEC Filings

Add it all up, and the typical McDonald’s has seen its cumulative customer count decline by more than 13% over the past seven years, according to a Restaurant Business estimate.

And that’s coming off a smaller base of restaurants.

McDonald’s peaked at 14,350 locations in 2014. Since then, it has closed a net of more than 500 locations, finishing 2019 with 13,846 restaurants. To be sure, many of those closed locations were inside places like Walmart, and their sales weren’t as strong. But there are 3.5% fewer McDonald’s than there were five years ago.

McDonald's U.S. unit count

Source: SEC Filings

The yearslong decline in traffic comes in part from the company’s shift away from the heavy discounting that marked its recession-era market strategy. McDonald’s used the Dollar Menu effectively during the recession to continue to generate sales growth, which helped it destroy competitors and build its unit volumes.

As such, much of the traffic decline has come from low-profit budget consumers. And the company has replaced them with more premium customers. In other words, fewer $3 diners and more $6 diners.

McDonald’s most recent figures demonstrate this shift. Its average check last quarter increased about 7%. The company said about 40%  of the increase, or approximately 2.8%, came through price increases. The rest, 4.2%, came from “mix,” meaning customers are ordering more items, more expensive items or both.

Those numbers are good for the company’s franchisees, who enjoyed record cash flow in 2019. Customers who pay more per order are more profitable than those who pay less, after all. And that’s as big a reason as any for the improving relations between the company and its owner-operators last year.

“It’s a really good thing when you have wealthy franchisees who are making a lot of money,” CEO Chris Kempczinski said. “It means their mentality is to be aggressive to invest in the business.”

(Note to any aspiring franchisor, and a few existing franchisors: Print out and frame that quote.)

But franchisees are also cognizant of the traffic challenge. Operators we’ve spoken with in recent months have all quietly worried about declining customer count. They understand its potential long-term impact on the company and on their business.

“Over half of our franchisees are second- and third-generation franchisees,” Kempczinski said. “They completely recognize that no family business survives or thrives by passing on fewer customers from one generation to the next.”

The challenge is to address the traffic problem without going too far in the wrong direction and hurting operator profitability. McDonald’s has deployed a variety of local and national value strategies to drive traffic, which haven’t quite worked. Operational improvements have yet to bear traffic fruit, too.  

Company executives said they are working with operators to strike the right balance between traffic and sales growth.

“We’ve just got to make sure that we have balance,” Kempczinski said. “We need to have balance between check growth, and we need to get to transaction growth, and that’s what everybody in the U.S. is working toward right now.”

It will not be easy. Executives said that the biggest problem appears to be in the morning, where McDonald’s has traditionally had a dominant position but which is increasingly competitive. And Wendy’s is joining the fray later this year with its own breakfast daypart.

“We have to win at breakfast,” Kempczinski said. “There’s obviously a lot of focus and attention we’re going to be putting on that in 2020.”

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