MCD at 4-Year Lows: Beverages & Mobile Orders Offer Next Bullish Catalyst

SPEAKER_1 (0:00)

It's time now for our watchlist panel, and we're discussing McDonald's. McDonald's has been under pressure here, one year down over 20% and sitting at 52 week lows. Joining me for this conversation, Bryan Gildenberg, Managing Director, Retail Cities, and Phil Kafarakis, CEO of IFMA, the Food Away From Home Association. And we did have an investor meeting last week where the officials did talk about their next strategy, growth plan, increasing productivity, and also restaurant design, simplification of the operations, targeted marketing, also menu improvement, and deployment of AI operating systems. What did you think of all this here? Bryan, your thoughts.

Bryan Gildenberg (0:45)

Well, first, thanks to all for having me on. Good to see you. Yeah, I mean, that's a lot, I guess, is probably the overall takeaway.

I think a lot of what McDonald's is trying to do makes sense. And I think fundamentally, what they're doing is trying to retool a fast food restaurant for what I would call the post-COVID world.

40 percent of McDonald's orders from the five largest markets in the world come from a mobile device. That's probably up from zero pre-COVID. And the notion that a fast food restaurant is an order in advance and pick up facility rather than a come in and fulfill quickly or go through the drive-through. That fundamental shift is huge. The investment they're needing to make with their franchisees to help get them there is significant. And I think that's one of the reasons why the stock is down so much. But a lot of what they seem to be trying to do, expanding day parts, expanding beverages, and expanding chicken, all that seems to make sense.

SPEAKER_1 (1:41)

It's amazing because the stock just hit an all-time high in March this year. So and then it pulls back. So very interesting to see what's going on, the volatility in the stock. But Phil, I mean, we've noted that folks, maybe there's fewer folks walking in there, but the ticket's more expensive. You know, they're spending more. And maybe it's because the Big Mac, I was reading, you know, how much is a Big Mac? Are people willing to spend $10, $15, $20 at McDonald's? And maybe they want to go somewhere else, casual dining or something. What do you think are some of the trends that we're seeing?

Phil Kafarakis (2:13)

Yeah, I mean, they're trying to do what they can to get it back, but they're a quick service restaurant.

At the end of the day, it's quick food, it's got to be hot, and it's got to be of value. So they're struggling with respect to operations in the store. They've got great tech strategy, as mentioned.

97% of their stores have drive-throughs. So it should really be focused on productivity shifts. When you think about the work they're going to try to do, they're going to put money back into the operation. The operational side of store execution is a problem. They've got 60% of their franchisees that did not participate in their $3 value meal promotion. They've got some confidence with the franchisees, but at the same time, 98% of them in their own association, owner's association declared that they're not making as much money as they like. So bringing the 8.5 billion they're going to bring in a capital improvement to do something in the back of the house is going to be problematic, especially when you're talking about breading chicken. Come on, in the back of a McDonald's, they know who they are, they run the market, they really need to move that tech productivity into expanding transactions. And the dollars are going to be tough to get because consumers, as they indicated on their call, are really driving for value. So they've got to make sure they stay focused and not spread themselves so thin with what they announced in their next strategy.

SPEAKER_1 (3:36)

So, I wonder, is this a McDonald's problem or an eating out problem? Because the analysts were talking about Brinker and that some of the casual dining restaurants are outperforming.

Brinker has chilies and they also talked about, or outback with its owner, Blumenbrand's Cheesecake Factory, Robin Gourmet Burger, that these are not far behind. You know, you think about where are people going and where they're willing to spend. You mentioned chicken there, Phil. Bryan, why don't you take a look at that? Because that was one of the areas that might actually see growth for McDonald's. Just the sheer size of this name gives it the muscles that it needs to, right? I mean, McDonald's is huge.

Bryan Gildenberg (4:19)

Yeah. I mean, two things. One, I think if you're looking at the fast casual chains, the economic impact of fuel prices hurt shoppers more, though less their income is. I mean, it's basically, it's a flat dollar tax on shoppers, right? So the shoppers that are at the lower end of the income curve, which are going to traditionally be a little bit more of your fast food McDonald shoppers, are going to get hurt more by rising fuel prices than someone that goes to Chili's or to Outback or to a higher end restaurant. So I think that's some of the pressure point that they're feeling in the short term, certainly.