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MCD hosted a reimaging tour yesterday in Tampa.  McDonald’s is constantly focused on its brand position and customer experience and this shone through yesterday as management walked analysts through three restaurants in the Tampa area, detailing the improvements being made to restaurants through the reimaging/rebuilding multi-year plan.  These improvements range from a complete overhaul of the exterior and interior appearance and feel to the construction of side-by-side drive-through lanes to the installation.  The tour was impressive, insightful, and bodes well for the success of McDonald’s over the longer-term.

MCD REIMAGING TOUR - MCD Seffner 1

Remodels

The first two restaurants of the tour were recently remodeled.  Both remodels were completed in 2010, as part of the total 200 remodels completed last year.  The intention going forward is for between 175 to 225 remodels to take place each year.  These remodels are comprehensive, including interior and exterior overhauls, a new “modernized” menu, and new POS systems.  Ultimately, management said, there is potential for roughly 4,500 restaurants to be remodeled over the coming years (compared to a total 14,000 system-wide U.S. restaurants.  MCD offers to pay for 40% of the franchisee’s total renovation cost which serves to incentivize rollout across the system.  In the case of early adopters, the company will pay 45% of total renovation costs for franchisees.  As this plan is carried out, management expects a sales lift in renovated stores and a “halo effect” as the proportion of the system that has been renovated reaches 50%.  This is an effect MCD has observed in Europe and Australia.

The targeted time-span for a remodel is 4-6 weeks.  The first remodeled restaurant we visited in Clearwater took 60 days but management expects this to come down as the plan for system-wide remodeling progresses.  The restaurants do not close during the remodeling process, rather the drive-through might remain open while the lobby is renovated and then, upon the reopening of the lobby, the drive-through would be closed or vice versa.  After reopening, remodeled restaurants experience a sales lift of 6-7% in excess of market.  Management did also say that the “Grand Opening” typically lasts for 13 months and consists of constant events and advertising to draw attention to the remodeled restaurant. 

The exterior overhauls are quite dramatic when compared to the appearance of the restaurants before the remodel.  The facades are far more striking and visible from the street.  The arcade design is more aesthetically pleasing but a combination of prominent signage and lighting maintains the “McDonald’s” feel.   The side-by-side drive-through has allowed for a significant increase in transactions-per-hour without any incremental investment in labor.  Using digital photographs to match cars to orders, restaurant staff can quickly and accurately take, receive payment for, and deliver orders far faster than before.  With a mere 20 seconds ordering time, a staff member in Brandon, Florida estimated that her restaurant saw an average of 120 transactions per hour during peak times versus 100 with the old drive-through format.  On one day, she said, 145 transactions were processed in an hour.   One challenge that management spoke of during the day was customers seeing long drive-through lines and deciding not to wait; this improvement clearly captures lost traffic and while we were standing beside one restaurant, it was noticeable that the cars were moving through the property rapidly.  Inside the store, too, workers focused on the drive-through derive benefit from an optimized booth for beverages.  The space for the expanded beverage capacity demanded by the addition of McCafe products was taken from the lobby.  Workers presenting food at the drive-through window have all beverages within easy reach.

MCD REIMAGING TOUR - mcd drive thru

MCD REIMAGING TOUR - mcd mccafe

The interior renovations are, if anything, more striking than those of the exterior.  Sleek design, higher ceilings in some cases, flat screen TV’s, and communal seating represents a distinct shift in the standard customers are met with.  Most importantly, the speed and accuracy of service is enhanced in remodeled restaurants thanks to the new POS system.  A reduction in the number of screens staff needs to navigate, as well as a simpler operating platform that reduces training time, has caused roughly 10 seconds to be shaved off the service time. 

Overall, the improvements made to the restaurants serve to improve the customer experience, bringing improved service as well as a much-improved environment on the inside of the restaurant.

MCD REIMAGING TOUR - mcd interior

Scrape & Rebuilds

While rebuilds are obviously more disruptive and costly than remodels, management offered many reasons why they can be desirable from a long-term perspective.  Restaurants producing lower-than-expected volumes are relocated at a rate of ~30-50 per year but the company has found significant results in rebuilds which, more often than not, require some repositioning of the restaurant on the lot and/or an expansion in the total size of the restaurant.   This can accommodate the tackling of structural issues with water-pipes or power-lines that can exist with older stores.  The third restaurant we toured in Tampa was a very good example of the benefit that can be derived from rebuilds.  Rebuilds cost roughly $2.1 million, inclusive of $1.3 million for construction (split 50-50 between company and operator) and $1.1 million for fixtures, furniture, and equipment (operator covers this). 

Generally the difference between a decision to remodel or to rebuild hinges largely on the exterior.  Improving visibility of the restaurant to vehicular traffic is sometimes best achieved by moving the restaurant on its lot and we were able to see an example of this yesterday.   Please see an example of this below (first chart).  By reorienting the building so that it is perpendicular to the road, management improved the visibility of the restaurants to the road.  Previously, visibility on the north end was obscured by the play area.  The subsequent design, as the accompanying picture shows, incorporates the play area within the building, facing east, thereby not impeding drivers’ ability to recognize the brand immediately (second chart). 

A rebuild typically takes 90 days and requires the full closure of the property.  When reopened, sales increase by 15-20%.  Throughout the event, different members of the IR team maintained that no particular day part seen a disproportionate benefit from the new look and feel of the remodeled properties; the sales lift is broad-based in terms of guest counts.

MCD REIMAGING TOUR - MCD rebuild map

MCD REIMAGING TOUR - MCD front

Rory Green

Analyst