THE HEDGEYE EDGE
McDonald's (MCD) has been on a great run from 3Q15 to now, starting with the simplification of their menu, introduction of All Day Breakfast (ADB), the trial of many value platforms, store remodels, and roll-out of Experience of the Future (EOTF), just to name a few things they have been working on.
But the thing is, all companies go through cycles, and we believe MCD is about to enter a down-cycle.
IS HISTORY ABOUT TO REPEAT ITSELF?
Despite industry sales improving as tracked by Knapp-Track and Black Box, MCD has been a consistent share donator within the $1B+ chain sandwich segment. We believe their significant investment ($2.4B in capex in 2018, up ~30% YoY), in partnership with franchisees who are putting in their own additional capital, into remodels and EOTF are necessary, but may not bear fruit to the extent management is hoping. Specifically, the adoption curve on kiosk ordering appears to be steeper than expected.
COMPLEXITY IS THE SILENT KILLER OF GROWTH
Furthermore, MCD is going the wrong way on menu items and value. They did a great job reducing complexity in 2015 and it yielded positive results, but as cycles go, they are reverting to their past mistakes. Value wins in the restaurant space, and MCD has been a mainstay in the category, keeping their check average well below the sandwich segment average. But in 2017 with the introduction of premium items we saw a notable decline in the spread between MCD and the segment average. Are value consumers going to Burger King?
Running efficient restaurants is a key to success, and it all boils down to time in motion – how many steps is each employee taking. Going harder on McCafé, made-to-order fresh beef, All Day Breakfast, menu innovation, and the addition of multiple digital ordering channels (Mobile Order & Pay, UberEats and Kiosk) all add complexity to the restaurant. These are a huge tax on employees and cause the process from order to delivered food to take longer.
COMPETITION REMAINS INTENSE
It’s not just the public players you have to worry about. Private restaurants such as Five Guys and Chick-fil-A have been growing units at a mid-single digit pace for years, stealing share from the bigger players such as MCD. From 2010 to 2017 Chick-fil-A expanded its market share by 395bps to 8.5%, while MCD’s market share receded by 425bps to 37.1%.
It’s not just the competition for sales, it’s the competition for strong employees as well, as MCD makes the job harder, while we are at a 3.9% unemployment rate, we think some top talent will look for greener pastures over time.
ONE-YEAR TRAILING CHART
