Can Focus On “Gourmet” Food Drive Revenues For McDonald’s?
McDonald’s (NYSE:MCD) is working overtime to transition itself from a “junk food” destination to a fast casual dining restaurant. Over the past year the company has introduced several healthier menu options to attract customers who are looking for fresh and healthy food which is served quickly. The latest innovation of the company was to introduce forks and knives with its “Signature Burger” in France. The demand for gourmet burgers is on the rise and McDonald’s is gearing itself to capture this trend. The Signature Burgers costs twice as much as a normal burger and if the company finds enough customers who would opt for this menu item, the average spend per customer at a McDonald’s restaurant can increase significantly. Between 2015 and 2017 this number increased from $3.38 to $3.60 and we expect this metric to remain in this range over our forecast period.
However, if through its push for high priced healthier and gourmet food items McDonald’s is able to increase this number to $4.50 by the end of our forecast period, there can be a nearly 25% upside to our price estimate.
While the company is constantly innovating and introducing more “gourmet” menu items, its image as a destination for a quick and value meal is difficult to change. Further, McDonald’s loyal customer base is consumers who are looking for a cheaper meal. Studies reveal that several customers are being turned off by a $13 burger. While the average lunch burger check which includes a burger, beverage, and fries has increased by nearly 4% in the last one year (according to NPD), higher costs of eating out would impact the number of customers visiting these fast casual chains. For McDonald’s the challenge is to provide “better burgers” at a price which is not exorbitant, retaining its “value” tag. McDonald’s serves nearly 600,000 customers on an average in each of its restaurants every year and while this number has declined from a high of 730,000 in 2012, we expect these volumes to continue over our forecast period.
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It is important for McDonald’s to maintain its volumes and ensure that its “gourmet” prices do not drive customers away. There can be a nearly 20% downside to our price estimate if the average annual customers at a McDonald’s restaurant declines to 500,000 by the end of our forecast period.
McDonald’s is trying to adapt itself to changing customer preferences by introducing healthier menu items. However, the company is also ensuring that it does not lose its identity of a “value” restaurant where the average ticket size for a burger meal is reasonable. The company needs to introduce healthier options at prices which are not as high as those charged by specialty restaurants. The company needs to tread the transformation path carefully so that it does not lose its loyal customer base and at the same time is able to make its menu more akin to customer preferences.
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