When McDonald’s debuted its all-day breakfast menu last fall, customers hit up the chain in droves, lured by the simple novelty of being able to scarf down an Egg McMuffin after the once iron-clad 10:30 a.m. cut-off time.
The frenzy gave a badly needed sales jolt to a lumbering fast-food giant that had long struggled with sagging sales.
But if you thought anytime hot cakes and hash browns could be a panacea for what ails McDonald’s, the company’s latest quarterly results offer a clear message: McDonald’s problems were always more complicated than that.
The Golden Arches said on Tuesday that sales were up 1.8 percent at its U.S. restaurants open more than a year. That’s only tepid growth, especially considering it’s a year-over-year comparison to a quarter in which sales sank 2 percent. Investors sent the stock down nearly 5 percent in Tuesday morning trading, likely because they had been expecting a more robust increase.
To be sure, adding all-day breakfast accomplished important things for McDonald’s: It showed customers that the company was listening to them. And it demonstrated to investors that new chief executive Steve Easterbrook is willing to take bold steps – not just make incremental tweaks – to try to pull the burger chain out of its rut. But even though McDonald’s plans to make even more items available on its all-day breakfast menu later this year, the offering appears to be bumping up against its limits in terms of its ability to drive long-term sales growth.
That’s why some of McDonald’s less-talked-about initiatives are crucial to its future. For starters, there’s the McPick 2 program, in which diners pay $2 for two items selected from a limited portion of the menu. It is effectively a replacement of the Dollar Menu, which was popular with value-conscious customers and which McDonald’s has been struggling to retool for years. (Remember the Dollar & More Menu?)
Executives said McPick 2 was a key sales tailwind this quarter and last, and this is significant. At a moment when fast-casual restaurants are gunning hard for more affluent diners, it is meaningful that McDonald’s has hit on this way of reconnecting with value-oriented customers – who likely present the chain’s best shot of getting its groove back.
McDonald’s has also been working on changes to speed up and improve service at the drive-thru window. The chain has simplified its drive-thru menu boards and has implemented a policy called “Ask, ask, tell,” which is meant to ensure that employees get the order right the first time. It has even adjusted the font size that is used on order receipts so workers don’t miss a special instruction such as “hold the mayonnaise.” Executives say these measures have helped speed up service meaningfully, and that is no small thing: It has been estimated that more than 60 percent of McDonald’s sales come from drive-thru orders.
As the company tries to solve the problems that are particular to its own brand, it will have to do so against what appears to be a backdrop of gathering storm clouds for the industry overall. Fast-food behemoths including Dunkin’ Donuts and Yum Brands, the parent of KFC, Pizza Hut and Taco Bell, have said a softness in the U.S. restaurant marketplace overall weighed on their businesses in recent months. According to market research firm NPD Group, traffic was flat at quick-service restaurants in the latest quarter and was down 2 percent as fast-casual spots. (The decline in fast-casual is the first recorded since NPD started tracking the category more than a decade ago.)
Meanwhile, drive-thru sales broadly appear to be under a more long-term siege. NPD recently found that drive-thru traffic declined by 128 million visits over the four years ending May 2016. In the meantime, food delivery orders grew by 69 million.