These Are McDonald's Plans for the Future

By Markets Fool.com

McDonald's (NYSE: MCD) CEO Steve Easterbrook has succeeded in his efforts to turn his company's once-flagging fortunes around. After years of sales struggles, specifically in its home market of the United States, the chain has ridden all-day breakfast, focused promotions, and other changes to steadily improving sales.

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In its most recent quarter, the company saw global sales increase by 3.5%, operating income rise by 7%, and earnings per share (EPS) increase by 9% in constant currencies. In his comments during the Oct. 21 earnings call, Easterbrook was excited aboutanother strong period.

"I'm encouraged by the actions we've taken and the progress we have made as we execute our turnaround plan," he said during the call, which was transcribed by Seeking Alpha (registration required). "Customer perceptions of McDonald's have steadily improved over the past 18 months, and the third quarter marked five consecutive quarters of comparable sales growth across all business segments and many markets gaining share."

Those are great numbers and encouraging results, but the CEO made a point that even if the ship has been righted, it will still need to be steered in different directions.

"We are at a point where we've begun to transition from a focus on revitalization to a mindset that's concentrated on strengthening the business to drive sustainable growth over the long term," he said, noting that his thinking has moved from short-term fixes to building a long-term future. "We are not managing the business quarter-by-quarter. In fact, our commitment to investing in the business is stronger now than ever."

McDonald's plans to improve its food and change its ordering process. Image source: McDonald's.

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What is McDonald's doing now?

In a broad sense, Easterbook talked about placing an emphasis on food quality and value -- two areas that are often difficult to balance. He also mentioned that the chain plans to focus more on improving customer experience.

He pointed out that the company has already taken some big steps toward improving its food. In the U.S., that has included completely transitioning to chicken that has not been treated with antibiotics important to human medicine. In addition, it has introduced new buns that do not contain high-fructose corn syrup and it has removed artificial preservatives from its Chicken McNuggets.

McDonald's has also focused more on doing a better job of running its restaurants, which has produced noticeable results.

"Our commitment to raising the bar with an emphasis on underperforming restaurants is making a difference," said Easterbrook. "Customer satisfaction scores have improved the most for our bottom quintile restaurants. And we've cut the customer satisfaction score gap between the top and bottom quintile performance nearly in half through our efforts provide a better, more consistent experience for customers in every restaurant, every time they visit."

What is McDonald's future?

Aside from the continued evolution of its food toward using healthier, more natural ingredients, McDonald's plans to change its in-store experience. This effort, called "Experience of the Future" has been developed largely outside of the U.S., letting the company get things right before rolling it out in its home market.

"We're also modernizing the customer experience in markets around the world as we evolve to the Experience of the Future," Easterbrook said. "In Canada, we're engaging with customers in simpler, less stressful ways, offering them more choices in how they order or pay."

Those changes, which have also been tested in parts of Europe, involve using dual-point service and self-order kiosks. These two efforts change the traditional McDonald's experience. Dual-point service means that customers order in one place while picking up their food in a second location. That, along with the use of kiosks featuring tablets/touchscreen computers for ordering, lets the company do more with fewer people.

Is this going to work?

Moving toward healthier (or at least healthier-seeming) ingredients follows industry trends and it's something McDonald's has to do. In many cases, more natural products cost more money, making it a challenge to offer the improved food along with the value people expect from McDonald's.

That's where Experience of the Future may be essential. Ordering kiosks (and eventually other automation) can lessen the need for employees. The cost savings can then offset higher food costs while having the advantage of removing the possibility of human error in the ordering process (a tablet won't mishear "no pickles" as "more pickles").

All of this is a bit of a tightrope for the company. Food costs must still be kept in check while automation savings have to be balanced against customer experience. Easterbrook has a solid plan and shareholders have every reason to believe in his vision, but getting from stability to Experience of the Future almost certainly contains problems as yet unseen.

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