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McDonald's to Double Down on Value, Ramp Up Delivery

Joe Tenebruso, The Motley Fool

After McDonald's (NYSE: MCD) reported second-quarter results, its senior leadership team shared some interesting information regarding the restaurant titan's growth initiatives during its subsequent earnings conference call.

Here are four key takeaways from the July 26 call that all long-term investors should take note of.

1. There's a renewed emphasis on value

As we've said in the past, we must be competitive on value. We don't strive to win on value, but we won't lose either. With a sluggish IEO [informal eating out] market and the introduction of our $1 $2 $3 Dollar Menu at the beginning of the year, we've seen our competitors increase their attention on deals. Therefore, we know that we need to be more aggressive to compete effectively.  
-- CFO Kevin Ozan

McDonald's revamped Dollar Menu is driving incremental sales from budget-minded customers, and the restaurant chain is rotating in more special offers to further resonate with cost-focused diners. McDonald is also using its mobile app to extend more personalized deals to customers. Together, these lower-priced offerings are helping McDonald's deliver on its core value proposition: tasty, low-cost food served quickly and conveniently. In turn, the company's customer satisfaction scores are improving in many of its markets. 

McDonald's Quarter Pounder with cheese

Image source: McDonald's.

2. Better burgers are boosting sales

The U.S. [segment] also made strides in improving the taste of our food. The cooked-when-ordered Quarter Pounders made with fresh beef are hotter and juicier. We're pleased with the high customer awareness and enthusiastic responses. Sales are up, and market share gains indicate that within the large classic burger category, customers are choosing McDonald's more often.
-- CEO Stephen Easterbrook

The advent and rapid growth of the better-burger restaurant category have weighed on McDonald's results in recent years. Though few would argue that the quality of its burgers was ever the true focal point of its competitive strategy -- value, speed of service, and convenience were bigger priorities -- McDonald's is now placing a greater emphasis on higher-quality ingredients to win back market share. For example, its new Quarter Pounders made from fresh beef, rather than frozen patties, are proving popular with customers. In turn, these higher-priced -- and higher-margin -- products are helping to boost sales and profits.

3. McDonald's delivered solid comp growth, but declining traffic remains a challenge

Globally, comparable sales increased by 4% during the quarter, marking our 12th consecutive quarter of comparable sales growth. Global comparable guest counts declined slightly during the second quarter, dropping by 0.3%. Guest counts grew in all of our international operating segments, but in the U.S., quarterly guest counts decreased from a year ago.
-- Easterbrook

McDonald's enjoyed positive comparable-store sales in all of its business segments in the second quarter. U.S. comp sales rose 2.6%, driven by menu-price increases and a favorable product-mix shift. International comps were also solid, including a 4.9% increase in McDonald's "International Lead" segment (more established markets) and a 2.4% increase in its "High Growth" markets (regions with higher growth potential). 

Yet long-term comparable-store sales growth will be difficult without rising guest counts, and traffic trends were once again negative in the U.S. in the second quarter. This is an industrywide challenge, as more people are choosing to eat at home. Many people believe that food made at home is healthier, and retail store closures are reducing consumer traffic to malls and strip malls around the country. How McDonald's deals with these challenges will play a large role in determining its growth path.

4. McDonald's global retail footprint provides an edge in terms of delivery

The delivery market continues to grow. With the power of proximity, McDonald's is well positioned to be a leader in delivery. Across the globe, there are more than a billion people living less than 10 minutes from a McDonald's. That gives us a significant advantage in quickly bringing delicious food to our customers in their homes, offices, and college dorms. We've been moving at a pace that is unprecedented in the McDonald's system.
-- Easterbrook

One way McDonald's is combating declining traffic trends is by rolling out delivery service across its restaurant base. Delivery is now available at more than 13,000 McDonald's restaurants, up from 7,800 in July 2017. Customers are responding favorably, and delivery now represents as much as 10% of sales in several of the chain's top markets. 

Moreover, Easterbrook noted that delivery "requires virtually no additional investment and is tremendously effective in bringing profitable and incremental guest count." McDonald's is partnering with Uber Eats to rapidly expand delivery to more of its restaurants in the quarters ahead. Better still, McDonald's management appears excited about the "untapped potential" delivery represents in terms of the company growth.

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Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.