While the country’s public health situation appears to be worsening, McDonald’s believes it’s left the bottom behind. The fast-food chain running today, CEO Chris Kempczinski said Tuesday, is pandemic ready.
It took nearly 50 operating changes to get there, and it didn’t happen without some bruises. McDonald’s saw its net income sink 68 percent, year-over-year, in the second quarter to $483.8 million from $1.52 billion. Revenue dropped 30 percent to $3.8 billion from $5.4 billion as global same-store sales plunged 23.9 percent (8.7 percent in the U.S.) against a gain of 6.5 percent in the year-ago quarter. Before Q1's COVID-fueled slip, McDonald's reported positive gains for 19 consecutive periods.
McDonald’s also announced plans to accelerate some restaurant closings previously slated for future years. Of the 200 domestic closures expected for 2020 now, more than half are low-volume restaurants in Walmarts, CFO Kevin Ozan said.
McDonald’s has steadily, albeit slowly, trimmed its U.S. footprint since 2014, when there 14,350 locations.
Since (domestic end of year count):
Across its entire system in 2020, McDonald’s expects to open about 950 gross and 350 net new restaurants.
Kempczinski said this year’s tepid development doesn’t reflect long-term planning, especially in Europe where independent operator challenges could open opportunity. “So our expectation is that beginning next year, we go back to kind of where we thought we would have been for unit growth in 2021,” he said.
There were plenty of optimistic notes in McDonald’s Q2 report. In the U.S., the chain’s comps progressed into positive territory in July, Ozan said.
Same-store sales declined 19.2 percent in April; 5.1 percent in May; and 2.3 percent in June.
For McDonald’s International Operated Markets (home to U.K., France, and Germany), they tracked negative 66.7 percent, 40.5 percent, and 41.4 percent, respectively.
The other slice of McDonald’s business—International Development Licensed Markets and Corporate (where China is located)— comps dropped 32.3 percent, 20 percent, and 20.3 percent across those months. McDonald’s credited the plateau to China trends, where consumers retrenched after early recovery. Also, only 15 percent of China restaurants boast a drive-thru.
A lead detractor overseas is the fact nearly 70 percent of customers’ orders came in-restaurant pre-COVID-19.
THE COVID-19 ROAD FOR MCDONALD'S SO FAR:
McDonald’s global comps accelerated to negative 12 percent in June, meaning it recovered close to 90 percent of its 2019 sales. And despite the challenged environment, McDonald's restaurants generated north of $19 billion in systemwide sales for the quarter.
Notably, though, McDonald’s entered Q2 with roughly 75 percent of its restaurants opened. As of today, nearly all are back on line for either limited dine-in service or off-premises-only business via drive thru, takeout, and delivery. Kempczinski said McDonald’s had to close and reopen 9,000 restaurants so far during the pandemic.
McDonald’s announced last week it would pause reopening U.S. dining rooms at corporate stores for another 30 days (it made a similar move roughly a month before). Currently, there are 2,000 or so domestic dining rooms open, Ozan said. McDonald’s is not approving any additional reopenings, but the decision remains at the operator level.
Breakfast, playing offense, and thinking value
Ozan said Tuesday McDonald’s breakfast business continues to be disproportionally hit by COVID-19 behavior as commuting and solo occasions drop off. And drive-thru accounted for nearly 90 percent of U.S. sales in Q2—a common pandemic theme for McDonald’s, a brand that enjoys 95 percent drive-thru coverage domestically.
The breakfast battle isn’t a simple one, Ozan said. He noted McDonald’s is actually growing share in the hotly contested daypart; it’s just dragging from an overall standpoint as the category itself suffers.
McDonald’s had a host of issues with breakfast pre-pandemic. But those could be credited to a reverse effect of sorts. It was the only industry daypart expanding, and, as a result, competitors started to flood the space, like Wendy’s. “That certainly was one area of pressure for us,” Ozan said.
He also admitted a focus lapse as McDonald’s spent more time, energy, and investment on other goals. Expect that to change in a post-COVID-19 landscape, Ozan said.
There will be “rededication from a marketing and investment standpoint” as McDonald’s goes after breakfast again.
“I think our ability through the drive-thrus right now to be fast at breakfast is certainly an advantage that we're looking for going forward,” he said. Ozan hinted at future product innovation as well.
McDonald’s drive-thru times improved across most major markets in Q2, Kempczinski said, averaging 15–20 second faster. Menus were modified and pared down due to COVID-19, including the removal of All Day Breakfast. Kempczinski said it’s helped productivity and margins, and enabled better execution. Moving forward, some products will return, he added, but it’s an equally safe bet “we’re not going to go all the way back to where we were.”
“Now, as we kind of go into a more normal, or what we're kind of saying new normal, next normal, whatever the phrase you want to use for this operating environment, it's time for us to get back on the front foot,” CEO Chris Kempczinski said.
“How that evolution looks is going to vary market to market in the U.S.,” Kempczinski said. “I do know there is innovation that is planned for later this year that's going to bring some menu items on. And then, with U.S. operators, talk with our team has been, ‘let's just make sure every item that we add earns its way back onto the menu.’”
A previously touted initiative that’s ready to spark for McDonald’s is what Kempczinski called the brand's “marketing war chest,” which it plans to invest in the back half of 2020. During Q2, most major markets reduced spend and value activities as McDonald’s assumed a defensive posture.
In the U.S., for instance, marketing spend decreased 70 percent. These funds will now be reinvested in Q3 and Q4, Kempczinski said.
Additionally, McDonald’s corporate will pour an incremental $200 million across its U.S. and Operated Markets in the second half to accelerate recovery, or roughly the equivalent to one additional month of media in every owned market.
Kempczinski said the bulk of that will not go toward innovation. Rather, it will focus on core menu items and spotlighting service channel opportunities, like digital.
It’s going to largely support McDonald’s base business, he said. “Because our view is, right now, consumers are still looking for sort of the trusted favorites, which is why core menu makes sense for us,” Kempczinski said.
McDonald’s is done being conservative. “Now, as we kind of go into a more normal, or what we're kind of saying new normal, next normal, whatever the phrase you want to use for this operating environment, it's time for us to get back on the front foot,” Kempczinski added.
BTIG analyst Peter Saleh wrote Tuesday in a note he predicts McDonald’s “will leverage its drive-thru access, and substantially higher marketing and advertising budget to take share from smaller competitors.”
Beyond a marketing blitz, McDonald’s is starting to think about affordability and value in a renewed light, and what role it could play amid a changed consumer dynamic. Kempczinski said they’ve conducted weekly consumer tracking surveys in top markets. What’s popped is concern and anxiety around the economy, he said, and a belief we’re in a “sort of recessionary type of dynamic.” In many cases, economic worries eclipsed public health or safety concerns, Kempczinski said.
“And so as I look at all of that, I'm certainly not qualified to make any predictions around whether we're going to be in recession or not, but I'd certainly say there's a lot of warning signs out there that would suggest that the consumer sentiment and consumer concern about the economy is negative and going in the wrong direction,” he said.
What could this mean for McDonald’s? Likely what it’s meant in the past, which is a stance where affordability leads as a key component of marketing mix.
How this plays out if unemployment benefits retract to an additional $200 per week from $600 is something to watch as well.
McDonald’s has also restarted remodel activity after pausing most project work early in the pandemic. Ozan said expected capital spend for 2020 is now about $1.6 billion versus an original call of $2.4 billion. About half of that will go to U.S. restaurants, including the completion of roughly 900 Experience of the Future projects.
While guest counts are down, McDonald’s has seen average checks bump some 30 percent domestically, Kempczinski said. Delivery became a more pronounced part of the mix (as high as 10 percent in some international markets, like Australia), and customers are simply ordering more per visit, perhaps for their families, and so forth. As traffic improved, however, check come down to more normal levels, he said.