Here’s How Table Service Can Impact McDonald’s Profitability

The days of a quick counter service atMcDonald’s (NYSE:MCD) appear to be numbered. The company is looking to bring the “experience of the future” to all its U.S. restaurants in the next few years. McDonald’s is upgrading its U.S. restaurants by adding self-service ordering kiosks, craft burgers and table service to its stores. As the company works towards transforming itself to adapt to changing consumer needs, McDonalds is looking to change its image from quick service “junk food” restaurant to a “modern and progressive burger company”. In the recent past the company introduced several changes to its menu to make it healthier and is investing in employees (training tools, better pay) and technology (mobile order and pay, kiosks) to improve the customer experience. The testing for table service began late last year and the company now appears to be ready for a larger roll out. As the company looks to elevate the customer experience and provide more customized menu items, this initiative can induce a higher average spend per customer per restaurant visit, in our view. If the company is able to sustain or increase the traffic at its stores along with a higher average spend, it can have a significant positive impact on McDonald’s valuation in the long term.

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“Better McDonald’s”- Higher Spend

The table service initiative at McDonald’s is aimed at making the restaurant experience less stressful and more fun for families with kids and larger groups. Instead of standing in queues while managing kids to order the meals, customers can comfortably manage their orders while being seated at tables. This option should entice large groups and families with small children to increase their visits to the restaurant and spend more at each visit, given that the service option makes it easier to order multiple courses. While providing table service can put pressure on restaurant space and employee time, McDonald’s is combining this roll out with other initiatives, such as mobile order and pay and self-ordering kiosks. This will allow customers looking for a quick service to opt for the other digital ordering options, which will also provide order customizations.

As McDonald’s looks at making the customer experience “better”, it can lead to an increased spend by consumers at its restaurants. We expect the average spend per customer visit at a McDonald’s restaurant to remain steady at around $3.40 over our forecast period.

McDonald’s is losing its appeal to the new generation of millennials and is looking for ways to attract these consumers back to its restaurants. Table service is one such initiative which is aimed at making the consumer experience better and stress free. Currently the company derives nearly 70% of its revenues from the drive through and enticing customers to the restaurants for a sit down meal can increase sales. In an attempt to attract millennials, McDonald’s carries the risk to losing its loyal generations of baby boomers and Gen X, who might find the new concept intimidating and “unlike” the McDonald’s they know well. However, we believe the downside to this transformation will be limited, since the company will have ordering kiosks and drive through. It is investing continuously in its employees and technology. However, whether a “Better McDonald’s” will result in higher profitability or not, remains to be seen.

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