In the quick service restaurant (QSR) industry, there are two recurring themes. First, low prices and high convenience always wins. Second, McDonald’s (NYSE:MCD) is consistently one step ahead of the QSR competition in terms of delivering the lowest prices and the highest convenience. That’s what keeps MCD stock one of the great QSR buys.
McDonald’s consistently has outperformed over the past five years. During that stretch, MCD stock has risen nearly 100%. The S&P 500 is up just 50% over the same time frame.
This over-performance from MCD stock will continue for the foreseeable future. This is largely because McDonald’s remains one step ahead of the QSR competition in terms of delivering the lowest prices and highest convenience to consumers.
Specifically, McDonald’s recent acquisition of decision technology firm Dynamic Yield puts the QSR chain ahead of the competition when it comes to integrating technology and data into brick-and-mortar operations.
This integration will only increase consumer convenience by personalizing and digitizing the consumer experience. It also has the potential to lower costs through cutting labor expenses.
As such, technology and data will power a bright future for McDonald’s. That future will be one wherein the company will continue to dominate on price and convenience, and where MCD stock will continue to out-perform.
Price and Convenience Always Win
When it comes to the QSR industry, only two things truly matter at the end of the day: price and convenience.
Just think about what a QSR is supposed to do. As the name implies, a QSR is supposed to give consumers quick food at reasonable prices. When consumers go to a QSR, their priorities are minimizing cost and maximizing convenience.
Sure, consumers may also want the meal to be healthy, but if healthy were the priority, the consumer would cook at home. Consumers may also want the meal to be very tasty, but if quality were the priority and cost weren’t an issue, the consumer would eat at a fancy restaurant.
As such, the priorities for a consumer going to a QSR are largely restricted to price and convenience. So long as prices are low, and convenience is high, the consumer’s highest priority needs are being met. That consumer is therefore likely to return when they are next seeking a low-cost, high-convenience meal or snack.
Because of this, the two things that matter most in the QSR industry are price and convenience. If a QSR dominates on price and convenience, then that QSR will continue to see customer and sales growth.
McDonald’s Always Is One Step Ahead
When it comes to price and convenience, McDonald’s has no peer in the QSR industry. This is mostly because everything McDonald’s does enhances the customer value prop through lowering prices and/or elevating convenience. Importantly, McDonald’s is also always one step ahead of the competition.
Example 1: in 2015, McDonald’s rolled out All-Day Breakfast. This was a novel breakthrough in the QSR industry that drove huge traffic growth, mostly because it increased consumer convenience (consumers could now order a McMuffin at any time of the day). Now, everyone has replicated the All-Day Breakfast initiative.
Example 2: once everyone replicated the All-Day Breakfast initiative, McDonald’s pivoted to revamping its menu to include fresher ingredients and healthier options. The revamp drove huge traffic growth, mostly because it increased convenience (healthier food was now available in a drive-thru setting) and lowered prices (healthier food was now being offered at McDonald’s prices). Since that revamp, mostly everyone in the QSR space has adopted broad healthy menu makeovers.
The next leg in this “one step ahead” growth narrative will come from technology and data integration. Specifically, McDonald’s recently acquired decision technology firm Dynamic Yield. The plan? Take Dynamic Yield’s decision technology and data analytics, and integrate it into McDonald’s brick-and-mortar locations worldwide. That integration includes digital, dynamic, and data-driven ordering kiosks and drive-thru menu displays, which should create a more personalized customer experience.
The result? Increased consumer convenience and lower prices. Data-driven digital ordering kiosks will make the checkout experience quicker, easier, and overall better. Further, if data-driven digital ordering kiosks are that good, then they will inevitably phase out human cashiers. That will lower labor expenses, and allow McDonald’s to pass those cost savings onto consumers through lower prices.
Bottom Line on MCD Stock
In the QSR industry, price and convenience are most important. Thus, the QSR chain that dominates on price and convenience will be the winning QSR chain.
Over the past several years, that winning QSR chain has been McDonald’s, thanks to things like All-Day Breakfast and a menu revamp. McDonald’s will remain that winning chain for the next several years, too, thanks to the company pioneering a new era of technology-integrated and data-driven QSR operations.
Because of this, MCD stock projects as a winner for the foreseeable future. Valuation friction will rear its ugly head from time to time. But, in the big picture, the stock will remain on a healthy long term uptrend.
As of this writing, Luke Lango was long MCD.
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