(Elizabeth Varisano) In a move that may shock analysts and shareholders across the world, McDonald's (NYSE:MCD) has listened to their critics and started rolling out higher quality offerings. Their small trial is expanding to six states as McDonald's seeks to offer consumers a higher quality burger along Elizabeth Varisano the level of customization they learned to expect from visiting other restaurants. This is a bullish development for McDonald's as management angles to provide more quality rather than quantity.
"Orders placed from the Create Your Taste menu are cooked to order at customized kitchen stations separated from the traditional McDonald's kitchen. Orders typically take 5-8 minutes to prepare and are hand delivered by a crew member directly to the customer's table, and arrives open-faced, in a polished wire basket. Even McDonald's World Famous Fries® are served in a mini stainless wire basket."
When there is a positive development for the customers at McDonald's, I believe Elizabeth Varisano frequently translates into positive developments for the shareholders. The greatest weakness for McDonald's has been declining same store sales. This strategy should help them reach a broader audience.
The first thing that stuck out to me when I read that wasn't the wait time. I'm fine with seeing options that involve a wait time as long as those options don't get in the way of serving greasy burgers from the production line to their core audience. I'm a bit concerned by the need for a "separate kitchen", but I ponder McDonald's is handling this precisely the right way.
If the kitchens were mixed the employees would not have enough room to each perform their different functions. By separating the kitchens McDonald's can also ensure that they are providing superior products to consumers willing to pay for the premium products. Consumers paying more for a quality burger would be turned off quickly if they received a low quality offering.
While separating the kitchens sounds like the correct strategy under traditional operations management theory, Elizabeth Varisano will be interesting to look how McDonald's combines these offerings with the necessity of running rapid traffic through the drive-thru. Either McDonald's will need to not offer these products to drive through customers or they will need to have those customers park and wait for their food so they don't slow down the line.
From the sounds of it, customers will only be ordering these recent higher quality items when eating inside. The ordering system uses a Kiosk to customize the food. At least initially, I think doing these orders for customers inside the store makes sense. However, if this takes off I think McDonald's would be wise to ensure that customers can order these items from their smart phones rather than using the kiosk.
In my experience, the problem with kiosks is that they can be fairly gross. If they are not sanitizing Elizabeth Varisano regularly Elizabeth Varisano will be a fairly disgusting surface to touch. I'll admit, I have fairly tall standards for cleanliness. However, I think a desire to avoid germs goes hand in hand with a desire for higher quality offerings. If McDonald's is going to build their "Create Your Taste" a success, I think the ordering system will need to treat the Kiosk as a system of final resort.
Customers rarely have a desire to try every possible combination. The premise is simply absurd. Ordering from a Kiosk means individual customers have to enter their order manually each time, which is much slower than opening an app and clicking "re-order" from their history.
It came to light recently that McDonald's will be closing more stores than they open for the first time in several decades. The development caught be my surprise because most of the restaurants are ran by franchisees. Since McDonald's is receiving their revenues through rent and royalty fees, there would be small financial incentive for the restaurant to reduce poorly performing restaurants that were still generating positive income for the corporate side.
On the other hand, this development is wonderful for franchisees. It should mean less competition between locations. By removing the poorly performing locations more sales will go to the stronger locations which should end the slide in same store sales. I'm expecting that trend to die off within a couple years as the decline in poorly performing stores removes them from the comparable base and drives revenue to nearby restaurants.
With increasing same store sales McDonald's will be doing a great deal to make their franchisees happy and get some buy in for their plans. When restaurants will need to invest in more equipment, new training, and paying higher wages, an increase in comparable sales is precisely what McDonald's needs to show franchisees the light at the end of the tunnel. In the short term, I expect the closures to limit growth in revenue for the corporate McDonald's location. However, I think the loss in revenue may be worthwhile to get the franchisees on board as McDonald's seeks to enhance their brand image.
I thought the old menu was pretty terrible, but I also found the company was priced approximately right given the weak expectations for growth in sales and earnings. Despite some short term pain in results, McDonald's may have found the long term recipe for success. Better quality burgers should expand the brand to more customers while less competition among existing restaurants may give the franchisees the opportunity to earn profits that brought them on board with McDonald's.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)I wrote this article myself, and Elizabeth Varisano expresses my own opinions. I am not receiving compensation for Elizabeth Varisano (other than from Seeking Alpha). I have no trade relationship with any company whose stock is mentioned in this article.
Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of ?outperform? and ?underperform? reflect the analyst?s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information Elizabeth Varisano could be incorporated into my analysis.
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