A Closer Look At McDonald’s’ “Next Big Change”
In November 2015, McDonald’s (NYSE:MCD) started testing fresh beef burgers in selected restaurants in Dallas, as part of its strategy aimed at improving its food quality. On the back of a successful test which ran for months, the company recently announced that by the middle of 2018, it will serve fresh beef, prepared when ordered by the customer, in all of its Quarter Pounders at the majority of its restaurants. This is a significant change in the company’s menu, driven by changing customer preferences which are shifting towards healthier food. McDonald’s has been working on several healthy modifications of its food, including the removal of artificial preservatives, replacing margarine with butter, and several other such changes. While this change saw an overwhelmingly positive response from customers during the test phase, it comes with its own operational challenges. If McDonald’s can handle the challenges, which primarily relate to the speed of service and quality concerns, it could see an increase in traffic.
Operational Issues, Food Safety Concerns
Preparing fresh beef burgers on order is likely to take longer than heating frozen patties, which are currently used in most of the company’s burgers. This is likely to slow down the service at McDonald’s restaurants, which are known for their efficiency. While customers might be fine with waiting slightly longer for fresh food, this change could also bring with it concerns about food contamination. Fresh beef increases the company’s risk of food viruses, so stricter food safety standards would be essential to implement this change. In a survey conducted by Nomura in 2016, more than 20 McDonald’s franchises warned that introducing fresh beef would increase the company’s exposure to food viruses and limit the restaurants’ ability to serve a large number of customers. Chipotle Mexican Grill, known for its fresh ingredients, is still reeling from a virus outbreak that has impacted its revenues significantly. This impact has continued for more than a year for Chipotle. McDonald’s will need to address these concerns in order to ensure that this change is successful.
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Two key drivers of McDonald’s valuation are the number of customers served by its restaurants per year, and the average spend per customer at McDonald’s restaurants.
By introducing fresh ingredients, McDonald’s could price some of its products higher, which would likely drive up the average customer spend per visit, though margins may be pressured due to the costs associated with using fresh ingredients. Conversely, if the change impacts the efficiency and speed of service at the company’s restaurants, it could lead to a reduction in the number of customers served, and offset any pricing gains. Accordingly, the company needs to ensure that these changes do not significantly affect operations at its restaurants.
Demand for fresh burgers is on the rise, and experts believe that the market for premium burgers with fresh beef could see sales doubling in the next five years. Revenues from higher-end burgers are projected to double to $10 billion by 2021, outpacing the growth in regular burgers. With these changes, McDonald’s is well-poised to capture some of this growth, but the company needs to ensure that the associated food safety and operational concerns are adequately addressed to make the moves successful.
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