U.S. Markets closed

McDonald's Is Running Out of Room to Grow. What's Next?

Daniel B. Kline, The Motley Fool

The number of McDonald's (NYSE: MCD) locations in the United States has shrunk in each of the past three years. After peaking with 14,339 U.S. restaurants in 2014, that number dropped to 14,248 in 2015, 14,146 in 2016, and 14,027 to close 2017.

That's a relative drop in the bucket for a chain with 37,000 locations in 120 countries, but it shows that in its home market, the company has run out of room to expand. McDonald's management, though, has plans to continue its U.S. growth that don't involve adding new locations.

The exterior of a McDonald's

McDonald's has been revamping many of its stores. Image source: McDonald's.

Grow customer counts

In 2017, the fast food company's chief goal was serving more customers, according to comments from CEO Steve Easterbrook during the fourth-quarter earnings call. The chain grew its guest counts globally by 1.5% in Q4 and 1.9% for the year. This marked McDonald's first full year of comparable-guest-count growth since 2012. Comparable-store sales also grew by 0.3% for the year, the chain's best performance in six years.

Continue menu innovation

In past years, McDonald's had been surpassed by rivals when it comes to menu innovation. In 2017, the chain began a concerted effort to reverse that with both premium product offerings and adjustments to its value menu.

"We also recently launched Buttermilk Crispy Tenders in the U.S., which contributed in a meaningful way to our sales performance for the quarter," said Easterbrook. "Markets that have already modernized their restaurants now have the capacity and credibility to offer more premium beef and chicken sandwiches, such the Signature Collection in the U.K. and Seriously Chicken in Canada, which are driving brand perception scores higher and profitable top-line growth."

Double down on delivery

McDonald's began testing U.S. delivery in 200 restaurants in Florida in early 2017, partnering with UberEats. That program has since been expanded to 7,000 more restaurants in 21 different countries around the world, joining markets in Asia and the Middle East where the chain has offered delivery for years.

"Delivery orders tend to surpass average check size by 1.5 to 2 times, and with high customer satisfaction, we are seeing solid repeat business from those who try it," said the CEO. "During the fourth quarter, delivery gained traction and emerged as a meaningful contributor to our comparable sales in several of our largest markets."

Experience of the Future

The chain has been rolling out its Experience of the Future (EOTF) upgrade across the world. Those stores offer self-ordering kiosks and added drive-through options, including curbside pickup. Easterbrook said that early customer feedback has been very encouraging.

"They're telling us they like the new McDonald's better. They're awarding us with more frequent visits and they're spending more on average when they do," he said. "We have deployed Experience of the Future, or EOTF, in about one-third of the restaurants in the McDonald's system, including nearly 3,000 restaurants in the U.S."

Growing sales

When you reach market saturation, growth requires selling more out of additional stores. McDonald's has found smart ways to do that driven by technology. Mobile and kiosk-based ordering, for example, encourage larger check sizes -- you don't have to tell a human you want two large fries and a milkshake along with your combo meal.

The biggest challenge for the chain may be balancing consumers' desire for value with the need to keep margins up. So far that has not been a problem, as its $1, $2, $3 Dollar Menu promotion has been successful without stealing sales from pricier items.

Making the customer experience as easy as possible while giving consumers new menu reasons to stop by should keep the company growing. Easterbrook seems to have found a sensible blueprint for success that should deliver sustainable growth in the long-term.

More From The Motley Fool

Daniel B. Kline 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.