When it comes to the economic impact of COVID-19, McDonald’s Corp. believes the worst is behind them as sales trends are improving.
But big challenges lie ahead, including rebooting breakfast and guest traffic.
“For us, it’s now about accelerating the recovery,” CEO Chris Kempczinski said Tuesday morning during a conference call organized by Evercore ISI Virtual Consumer & Retail Summit.
Going forward, franchisees and the Chicago-based chain are looking at restarting remodels, reversing declining breakfast sales and rethinking the menu — including a possible launch of a premium chicken product.
“We put those plans on the shelf until we had more visibility,” Kempczinski said of the brand’s chicken test.
Kempczinski and Kevin Ozan, chief financial officer, talked about operational, menu and financial strategies as it reopens dining rooms across the U.S.
Limited menu and chicken
Prior to the COVID-19 crisis McDonald’s was experiencing strong guest traffic driven by a variety of factors — not just new menu items or a value program, Kempczinski said.
“It was everything from speed of service, improvements to menu to value,” he said.
Many chains, including McDonald’s, pressed the pause button on menu innovation when mandatory dine-in closures swept the nation.
Kempczinski said U.S. leaders, led by USA divisioin president Joe Erlinger, are “having conversations about” introducing a new chicken product.
In December and January, the brand tested two new premium sandwiches, the Crispy Chicken Sandwich and the Deluxe Crispy Chicken Sandwich, in Houston, Texas and Knoxville, Tenn.
“There’s a big opportunity for us in chicken,” Kempczinski said.
As for the prospects of keeping a limited menu during the recovery phase, Kempczinski said the priority is giving the customers what they want.
Some McDonald’s operators have supported keeping the trimmed menu because it allows them to serve customers faster. During the pandemic, McDonald’s noted that it has reduced drive-thru wait times by 25 seconds.
“And so, limited menu served a purpose for a period of time, but we have to be also attentive to what the customers are looking for when they come to a McDonald's and I think it's going to vary market by market,” he said.
Without elaborating, Kempczinski said the brand will “certainly” start adding things back to the menu.
“Whether it goes all the way back to where we were pre-COVID, I think that's probably unlikely. But I think it's equally unlikely that we're going to stay with the current menu,” he said.
Same-store sales in the U.S. were down 12% for the partial second quarter, which covers April and May. Ozan said the breakfast daypart was responsible for “more than half of the comp” decline. Lunch and dinner have been relatively flat during the pandemic, he added.
“We've talked about from the beginning of this that we thought breakfast was gonna be the most challenged day part,” Kempczinski said.
Prior to the pandemic, the company was looking at introducing new baked goods at breakfast.
“We put that on halt,” Kempczinski said.
The brand is “starting to turn the lights back on in terms of going after our breakfast business,” he said.
But Kempczinski said it is going to take some time to rebuild traffic, something the chain has learned from reviewing traffic patterns after restaurants closed temporarily for remodels.
“Breakfast is a habitual day part. Once you disrupt that routine, it takes time to sort of rebuild it,” Kempczinski said.
He said the comeback at breakfast will likely happen regionally, as the recovery phase and traffic patterns are different in each U.S. market.
Half the battle is making sure the brand has “customers out there looking for breakfast," Kempczinski added. He also acknowledged the various challengers in the space.
In early March, Wendy’s launched breakfast only to have dine-in shut down a few weeks later to stop the spread of the novel coronavirus.
“We know a lot of people are interested in going after the breakfast business. And as we said previously, we intend to defend it,” Kempczinski said.
Unit growth and remodeling
When mandatory dine-in restrictions swept the nation, McDonald’s said it would save about $1 billion by reducing remodels and halting new unit growth primarily in international markets.
In the U.S., franchisees are looking to start up remodels again.
“That is a very positive sign of them wanting to invest in the business,” Ozan said, adding that it speaks to the health of the operator’s business.
Of the brand’s nearly 14,000 U.S. restaurants, nearly 10,000 have been converted to the so-called Experience of the Future design. The EOTF restaurants have been the cornerstone of the company’s Velocity Growth plan.
The makeovers, which often require operators to raze and rebuild, feature modern furniture, kiosks, curbside pick-up, upgraded drive-thrus lanes with digital AI-powered menu boards, dining room power outlets for charging devices and a pick up counter for delivery orders. Some remodel costs range from $160,000 to about $750,000, depending on the scope of the project.
Kempczinski said McDonald’s was in a good position going into the pandemic because most of the U.S. system had been remodeled.
“I would hate to be embarking on a major remodeling program coming out of the crisis,” he said. “I’m much happier that we are almost done.”
Outside the U.S., the chain said it plans to get back to a “normal rhythm” of new growth in 2021.
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