Maccas keeps modernising

Sometimes wonderful investment opportunities are hiding in plain sight. McDonalds, the famous Golden Arches, is one of the most competitively advantaged companies in the world. Its restaurants blanket the world, providing consumers with a convenient, well priced menu from breakfast until late into the night. But movies like “Supersize Me” made obvious a growing disenchantment with what it offered and a business transformation was needed. Thus, in order to stay relevant to fast-changing consumer preferences, it has been updating its brand and operations across the globe.

A structurally positive shift in the business model

First, McDonalds has evolved its model from being ~80% franchised to soon approach 95%, retaining just a small company operated base of stores that allow it to credibly innovate. The restructure is creating an even more capital efficient, shareholder friendly structure that leverages the strengths of local entrepreneurs.

Improving the customer experience

Since assuming the CEO role in 2015, Steve Easterbrook has led a strategy to modernise the famous burger chain. This started years ago in its major international markets, which together account for 40% of operating profits, and the results have been excellent. It is an all-encompassing update including, to touch on a few, improving food quality, removing artificial ingredients, adding digital options for ordering and paying, modern restaurant designs and expanding to delivery. “Experience of the Future” (EOTF) is the internal name given to the holistic upgrade of its restaurants.

Similar benefits are likely in the US  

Slow to begin in the US, EOTF is now being rapidly deployed. 4,000 US restaurants will be done by end 2018, and 8,000 by end 2019, transforming the brand in its home market. Indications are for strong improvements in the US business (also 40% of operating profits) over the next few years.  The average sales per restaurant in the US today lags the Lead International markets, including Australia, by 25% so the potential is huge.

Higher earnings, lower risk

Together these changes are improving returns on capital, lowering operating leverage but most importantly, we expect earnings ahead of expectations over the next several years.  McDonalds is currently a top holding in the Alphinity Global Fund.

Author: Nikki Thomas, Portfolio Manager