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McDonald's takes bold steps to expand and innovate

The world's most popular fast food chain has boasted many innovative ideas throughout its history. Most recently, McDonald's is testing a new type of outlet called CosMc's, which is intended to be a pilot project that focuses exclusively on fast food via drive-thru, specializing in customizable beverages and snacks. The city where the first CosMc's opened is Bolingbrook, a suburb of Chicago, Illinois, with a four-lane drive-thru. It opened in early December.

McDonald's plans are ambitious.

For now, CosMc's will only be located in the U.S. McDonald's plans to open about 10 of these pilot locations by the end of 2024, with all the others expected to be in the state of Texas. The company's CEO Chris Kempczinski said they will study the results from the pilot operations for at least a year. McDonald's currently has roughly 41,000 locations around the world and would like to increase that number to 50,000 by the end of 2027. David Henkes, managing partner of research firm Technomic, said compared to those numbers, 10 outlets is like a drop in a bucket full of water. However, this gives McDonald's the opportunity to take risks that it would not dare to take in conventional operations.[1]

The risks are in launching new products

But why did the chain, which is primarily associated with burgers, decide to take this step and why did it choose to create an entirely new brand? One of the main reasons is the growing interest in beverages, especially specialty coffee. Experts point to a significant increase in sales of these beverages within the fast food industry, and that is why McDonald's is looking to enter this lucrative market. At the same time, it seems that expanding the offer to include these drinks directly in existing outlets would cause problems in the kitchens and increase service times. CosMc's thus serves as an experimental area where McDonald's can test and innovate in the area of specialty drinks without affecting its regular business. Coffee drinks, due to their wide range of customization, could attract customers and increase profitability, while at the same time presenting a new opportunity to compete with specialty coffee shops like Starbucks.

Another advantage is that CosMc's protects the main McDonald's brand from the potential negative impact of introducing new products into an established chain and thus from customer dissatisfaction. Trying new and complex drinks could undermine the simplicity and effectiveness of the main menu, which focuses on familiar items and simple combinations. Creating a separate brand allows new concepts to be tested safely, without the risk of disappointed customers or frustrated staff.[2]

Fresher ingredients in their dishes

McDonald's is also planning a major overhaul of its burgers, the most significant change in decades. The chain wants to focus on quality improvements over a seven-year period, including new recipes and fresher ingredients. The goal is to compete with growing chains like Five Guys.

Despite the complications associated with adjustments to production processes, McDonald's wants to improve quality without slowing it down, but with the health of consumers in mind. The company is achieving strong sales growth in the U.S. and outperforming its competitors. McDonald's expects the revamped burgers to help it maintain its market position. At the same time, it is marketing using nostalgia to attract customers. The comprehensive renovation is part of McDonald's commitment to stay at the forefront of the fast food industry through continuous adaptation and improvement.[3]

Expansion into China, despite the opposite trend of the West

McDonald's decided to expand in China despite the slowing economic situation and geopolitical instability there. The company recently raised a 28% stake in its Chinese business from the Carlyle Group, increasing its stake to 48% and closing a deal worth $6 billion. The partnership with Chinese conglomerate CITIC provides McDonald's with significant political support in the complicated Chinese market, which is seen as a strategic move with high potential gains. McDonald's has doubled the number of its restaurants in China since 2017 to 5,500 and plans to surpass 10,000 outlets by 2028. Despite the stiff competition, analysts remain optimistic about McDonald's prospects in China, with the company's focus on digitalization and localization positioning it well in the country's growing limited-service restaurant sector.[4]

Snímek obrazovky 2024-01-09 v 16.22.03

McDonald's share price performance over the last 5 years. (Source: Google Finance)*

McDonald's Malaysia in lawsuit

McDonald's Malaysia has filed a lawsuit against the Boycott, Divestment and Sanctions (BDS) Malaysia movement, seeking US$1.31 million in damages for allegedly false and defamatory statements. The chain accuses BDS Malaysia of instigating the boycott through social media posts linking McDonald's and other companies to Israeli activities in Gaza, causing lost profits, job cuts and operational problems. Malaysia, a predominantly Muslim country, supports Palestine, leading to campaigns to boycott some Western brands. BDS Malaysia denies the defamation charges and is awaiting trial. McDonald's Malaysia says the lawsuit aims to protect its rights and interests.[1]

Conclusion

McDonald's is taking bold steps to expand and innovate. The experiment with a new type of outlet highlights its interest in the growing customizable beverage market. It is taking diverse and strategic steps to maintain its competitive position, counter new trends and adapt to changing customer preferences.

Adam Austera, Principal Analyst at Ozios

[*] Past performance is no guarantee of future results


[1] https://www.investing.com/news/stock-market-news/mcdonalds-malaysia-sues-israel-boycott-movement-for-1-million-in-damages-3264914

[1] https://www.investing.com/news/stock-market-news/mcdonalds-tests-cosmcs-stores-as-burger-chain-boosts-beverages-focus-3251571

[2]  https://edition.cnn.com/2023/12/09/business/cosmcs-mcdonalds-drinks/index.html

[3] https://www.investing.com/news/stock-market-news/mcdonalds-reinvents-its-burgers-a-fresh-take-on-the-big-mac-and-more-3247296

[4] https://www.investing.com/news/stock-market-news/mcdonalds-china-expansion-a-calculated-bet-against-western-retrenchment-3248954

Disclaimer:

The material herein is considered as marketing communication under the relevant laws and regulations, and as such is not a subject to any prohibition on dealing ahead of the dissemination of investment research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and should not be construed as containing investment advice, or an investment recommendation, or an offer of or solicitation for any transactions in financial instruments. The published content is intended for educational/informational purposes only. It does not take into account readers’ financial situation, personal experience or investment objectives. APME FX Trading Europe Ltd makes no representation that the information provided is accurate, current or complete; and therefore, assumes no liability for any losses arising from investments based on the supplied content. The past performance is not a guarantee of future results.

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