McDonald's Robust Growth Potential

McDonald’s Robust Growth Potential

As the largest fast food chain in the world, McDonald’s has obtained a business landscape of more than 37,000 stores in over 100 countries. Despite the challenging marketing environment, McDonald’s still shows strong growth potential, which is reflected in the confidence of the capital market. On January 30th 2019, McDonald's released its annual report for 2018. The company’s $21.03 billion dollar revenue in 2018 generates an 18% YOY (short for “year-on-year”) growth and the global comparable sales also improved with a 4.5% YOY growth. McDonald’s excellent financial performance heavily beat the consensus earnings. Forbes accordingly set an optimistic stock price estimate of $191 for it, given McDonald’s stock was at $181 at the time.

At nearly the same time, the independent investment adviser Richard Bernstein revealed that McDonald’s stock offers the most compelling value among its fast food counterparts, and Bernstein estimated that McDonald’s will achieve a 3% global same-restaurant sales growth in the future. Moreover, McDonald’s is Barclay’s 2019 top stock picked in the restaurant industry, who set an “overweight” rating and a price target of $208 for McDonald's stock.

Going back to the end of 2018, the confidence towards McDonald’s from the capital market significantly strengthened as McDonald’s share price hit record highs with a peak price of $187.59 in November 2018. Morgan Stanley analyst John Glass stated that 2019 would be even better for McDonald’s, upgrading McDonald’s stock from "equal weight" to "overweight.” Glass even strongly recommended McDonald’s as a safe haven for long-term investors since McDonald’s has attained a stable trend in the unstable market environment.

As the largest fast-food chain restaurant brand, McDonald’s was challenged by whether the restaurant should be fully self-owned or franchised, which is always one of the initial dilemmas. Self-owned restaurants can strengthen the company's control over them and facilitate the implementation of various reforms. However, they take up a lot of manpower, capital, and other costs, and drag down the company's expansion. At the same time, the franchised restaurants will deprive the company of full control, however they occupy less resources and are more conducive for the company's development. McDonald’s has been refranchising for a couple of years in order to become more efficient and less capital-intensive. The refranchising strategy has contributed to McDonald’s revenue growth for years, since it has resulted in lower revenues but higher operating margins.

The company has benefited from the franchise model as well by making good use of the significant estate portfolio which has been established over the years, and generated rent and royalty income afterwards. One of McDonald’s long-term goals is that 95% of its restaurants will be refranchised, and already by the end of 2018, that ratio has climbed up to nearly 93%. McDonald’s prominent financial performance of 2018 is attributed partly to its refranchising strategy which helped to lower the costs and increase the margins. More outstanding performance of McDonald’s in the future can be expected, as the growing number of its restaurants are owned by franchisees.

In the field of restaurants, optimizing customers’ experience always plays a crucial role along with the quality of products and service. Seeing the booming development of science and technology, more and more restaurants use technology initiatives to optimize their customers’ experience. During recent years, McDonald’s has implemented the famous “Experience of the Future” initiative which CEO Steve Easterbrook endorsed. Part of the initiative is revamping its stores by deploying technology such as self-serve kiosks and table service, enhancing the restaurant’s mobile and delivery systems. The initiative is expected to come to be fully operational by late 2020. The mobile ordering and payment systems are also rapidly being implemented in McDonald’s stores. The stores can use the data collected from the system for more effective marketing activities to generate more revenue. McDonald’s has also associated with relative platforms such as Uber Eats to introduce its delivery service. The effective and extensive use of technology turns out to be another key growth factor for McDonald’s because of the higher average check. According to Morgan Stanley analyst John Glass, the impact of McDonald’s store modernization efforts and updated business model is undervalued by the market. Glass also showed strong confidence in the effect of McDonald's extensive store modernization efforts, which would help enhance the financial performance for 2019.

McDonald's store modernization efforts have also received recognition from Bank of America analyst Gregory Francfort who said McDonald's had achieved success in Canada through leveraging its loyalty program to drive digital sales, growing percentage of kiosk ordering among in-store orders, and diversifying delivery mix.

Innovation will help the company keep up with the trend and consistently attract customers. Since Steve Easterbrook, McDonald’s CEO, took charge of McDonald’s in 2015, he started the innovation from the basic items such as the menu. Easterbrook renewed the menu by taking back unsuccessful products and bringing in a brand-new menu focusing on the best selling products. In addition, more better quality ingredients such as fresh beef have been included in the new menu. McDonald’s also introduced burgers with new tastes all over the world. For example, it has introduced Bacon Big Macs to American people.

In conclusion, McDonald’s has answered the demands of the capital markets and is expected to embrace a prosperous future by its competitiveness driven by its refranchising strategy, technology, and innovation.

Written By Yujia Zheng, Edited by Alexander Fleiss & Matt Durborow