McDonald’s filed 4th Quarter and Full Year financial results on the 23rd of January 2017. While we do not obsess over quarterly results, we do use the opportunity to assess whether a brand’s strengths remain intact. In the long term, we believe that the brand strength will impact an investment’s ability to continue to pay us increasing dividends to enable our current capital to become an annual dividend.
The McDonald’s Brand
WPP, the world’s largest communications group, publishes the BrandZ top 100 global brands and assigns a value to the world’s top brands.
McDonald’s brand is growing again. After a peak value of $95 billion in 2012, the brand value declined for three years to a low of $81 billion in 2015. These kinds of declines often represent ideal buying opportunities and that certainly proved to be true in the case of McDonald’s. 2016 saw a reversal of 9% as the brand jumped in value to over $88 billion.
McDonald’s Brand Value (USD Millions)
It is also worth noting that McDonald’s is the only brand in the global 2016 Top 100 brand ranking that is not a technology brand.
It is not essential to our investment strategy that McDonald’s stays in the top 10. Brand is one of the indicators we look at.
Steve Easterbrook, the CEO appointed in March 2015 when the brand value hit a low, is committed to becoming “recognised by our customers as the modern, progressive burger company.”
We are watching the following indicators of McDonald’s progress.
McDonald’s is improving the quality of the food served. Key initiatives include serving antibiotics free chicken, switching liquid margarine to real butter in the Egg McMuffin, removing high-fructose corn syrup from its buns and transitioning from frozen to fresh beef.
In addition to focusing on the quality of food served, ease of ordering is vital to the overall customer experience. McDonald’s is planning to launch mobile app order-and-pay functionality in 2017. McDonald’s has lagged Starbucks in this regard, the latter claiming 25% of orders are made outside the stores. “Order-ahead” traffic will grow rapidly. “Researcher Crone Consulting LLC estimates that in five years half of all sales at quick-service chains will be placed digitally before the customer ever steps on the premises. Today, less than 10 percent of the companies even offer the mobile ‘order-ahead’ feature”.
While McDonald’s is late to the mobile ordering party; the company is rolling out the technology to all US locations in 2017. This technology has the potential to positively impact sales as witnessed at Starbucks and Domino’s.
The advent of mobile ordering will likely include loyalty programs and incentives to drive repeat purchases.
McDonald’s has experimented with kiosk ordering under the “Create your taste” banner. This alternative ordering process, combined with table service, is intended to create an enhanced in-store experience. Trails have shown that kiosk ordered check size is greater as it is easier to experience the whole menu and diners are less rushed.
In time, a mobile ordering echo system may render kiosks redundant.
McDonald’s is looking to scale its delivery service which is seen as a significant, untapped opportunity in leading markets.
McDonald’s rolled out an additional 374 new global stores in 2016, about 1% of the total 36,899 store count.
Refranchising in China
McDonald’s is selling 80% of its China operations as part of its plan to increase franchised ownership to 95%. The company opened 168 net new restaurants in 2016 in the high growth China segment and are looking to add 300 per year, almost doubling the current store growth. McDonald’s aims to add a total of 1500 stores in China by 2022, targeting a total store count of 3800.
By way of comparison, Yum is adding 600 stores per year in China.
In addition to an increased rate of store openings, local operation of the restaurants will allow menus to better align with local tastes.
Impact of key initiatives
Based on our research, we believe that the McDonald’s brand story remains intact.
If we are correct, the company will at least maintain its customer base, allowing it to continue to generate cash to return to shareholders.
At AXIAM, we buy shares in companies, regardless of their geography, that have great brands that are known, loved and used by people around the world daily. We will continue to watch McDonald’s ability maintain their customer base and generate cash for shareholders. Sign up to our newsletter or follow us on Twitter to learn more about investment in the best global brands or contact our fund management team to invest.
The AXIAM Editorial team has written this article. Please see our disclaimer.