McDonald’s maintains growth plans despite difficulties

McDonald’s Corp. executives said the company will stick with its long-term goals as it moves into 2014 despite facing continued economic difficulties.

Company executives acknowledged during its biannual investor meeting that 2013 was a difficult year, with a stagnant dining industry depressing the top line while cost pressures from commodities and labor chipped away at the bottom line. But while the global and U.S. macro economies are not projected to improve much in 2014, McDonald’s officials nonetheless reiterated the company’s long-term annual target of systemwide sales growth between 3 percent and 5 percent.

“We don’t see significant changes [in macroeconomic trends] versus 2013, but we realize our performance isn’t entirely driven by the external environment,” chief financial officer Pete Bensen told investors at the chain’s Oak Brook, Ill., headquarters. “We’re focused on what is within our control: leveraging consumer insights, taking an honest assessment of our execution and sharing best practices with our markets around the world.”

The chain will focus on growing market share in the quick-service category by trying to attract consumers to “trade into” McDonald’s from outside the quick-service segment, increase the frequency of current guests and capture additional customers who might return to eating out when the economy recovers, chief executive Don Thompson said.

“All companies today are fighting even harder for growth in this environment, and we’re no exception,” he said. “We’re making adjustments as we strive to understand shifting dynamics. We can’t control how consumers respond to the environment, but we know our customers still want affordable food and beverage choices in convenient, contemporary restaurants.”

McDonald’s will have between $2.9 billion and $3 billion in capital expenditures in 2014, officials said.

Long-term targets remain intact

McDonald’s plans to open between 1,500 and 1,600 restaurants around the world next year.

“The biggest increase will come in APMEA, where most of the emerging-market opportunity resides,” Bensen said. “We’re not growing just for growth’s sake; we’re pursuing targeted opportunities.”

He added that the chain would remodel another 1,000 restaurants in 2014, which represents a natural deceleration of the pace of the McDonald’s reimaging program, as many markets near completion of the effort. In the United States, company and franchised restaurants would place more focus on expanding kitchen capacity in the back of the house, so the company has pushed many planned exterior remodeling projects to 2015, Bensen said.

In addition to investing in new restaurants and remodels, McDonald’s also is projected to raise its general and administrative expenses in 2014, by $200 million, to fund capacity enhancements in the restaurants, more digital platforms in marketing, and operations improvements, as well as its Worldwide Owner-Operator Convention and its sponsorship of the Winter Olympics in Sochi, Russia.

Labor costs are expected to increase slightly around the world, officials said, and projections for food cost inflation range between 1 percent and 2 percent in the United States and between 1.5 percent and 2.5 percent in Europe. Nonetheless, McDonald’s maintained its long-term annual growth target of a 6-percent to 7-percent increase in operating income.

Opportunities around the world

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Historically, McDonald’s has been able to enact menu price increases most years between 2 percent and 3 percent to counter usual increases in food or labor costs. However, Bensen said, inflation in general in the United States has trended below 2 percent, and prices at grocery stores are running only about 1 percent higher than a year earlier.

“If we still have low inflation levels around the world, that hinders our ability to take price,” Thompson said. “From a guest count perspective, there is more competitive intensity around price. What it really boils down to is how do we differentiate ourselves around the experience we can offer at McDonald’s.”

Menu innovation would be crucial to the effort, specifically in the four major areas of chicken, premium beef, beverages and breakfast, he said. Ongoing remodeling efforts would address McDonald’s strategy to modernize its restaurants, and the chain would look to “broaden accessibility” with new-unit growth and introducing affordable options at all price tiers, Thompson added.

He noted that McDonald’s “captures less than our fair share of the overall beverage category” and that seizing that opportunity could translate into $3 billion of annual sales worldwide.

The drink categories growing most around the world are coffee and tea, McDonald’s executives noted, adding that improvements around coffee could naturally strengthen another core part of the menu: breakfast. Chief operating officer Tim Fenton noted that the McCafé beverage format would spread to more markets around the world.

“We’ve learned that breakfast and coffee sales go hand in hand,” he said, “and many emerging markets with aspirations of 25 percent of sales coming from breakfast have learned to grow that daypart with coffee. It’s that loss leader that gets [customers] in and trades them up.”

Diving deeper into digital

Digital enhancements, either on the marketing end or in the restaurants with new payment or ordering technology, was the other potential sales driver featured at McDonald’s investor meeting. Moving from mass marketing to more one-to-one messaging with consumers would be “the future” for McDonald’s in the United States and around the world, global chief brand officer Steve Easterbrook said.

“We’ve relied on our scale and ability to speak with one voice to 69 million customers, and it’s worked nicely for us, but we must evolve,” Easterbrook said. “We must build deeper, one-to-one relationships that go beyond our restaurants, and it’s about being personalized, fun, social and interactive. We’ve made some progress.”

Tests of different digital initiatives are going on in several areas of the world, he said, including an augmented-reality “Track My Macca’s” app in Australia, self-order kiosks in France, and mobile-ordering tests in the United States and other markets.

“It’s all terrific stuff, but now we plan to move from market answers to system solutions,” Easterbrook said. “It doesn’t mean all markets will function the same way, but we will leverage our scale with outside partners to deliver the experience only McDonald’s can deliver.”

He noted that the company has been making investments with its franchisees around the world to fund an infrastructure that enables greater adoption of digital marketing. A new point-of-sale system that is becoming the standard in most McDonald’s restaurants around the world was a key step in building those foundations, Easterbrook said, as was rolling out free Wi-Fi to about two-thirds of its system.

“If we can make the customer experience smoother in every restaurant and make it fun, our customers reward us,” he said. “Part of the reason why certain markets are way ahead of others is because it’s not necessarily a race to be first, it’s to be the best.”

McDonald’s operates or franchises nearly 35,000 restaurants in more than 100 countries, including more than 14,000 locations in the United States.

Contact Mark Brandau at [email protected].
Follow him on Twitter: @Mark_from_NRN