Big-Boxed Lunch

What McDonald's Can Learn From Walmart and Target

Its back-to-basics plan is succeeding. Now it needs to think digitally.
WAL-MART STORES INC
+0.86
At Closing, January 22rd
105.45 USD
MCDONALD'S CORP
+0.09
At Closing, January 22rd
176.21 USD

Not long ago, it seemed the golden arches of McDonald's Corp. were in danger of crumbling under the weight of new competition and diners' emerging preference for healthy food.

But the fast-food giant has staged an impressive turnaround, largely by getting back to doing what it has always done best: It gave customers food they wanted to eat. (Hello, round-the-clock Egg McMuffins.) And it chased hard after budget-conscious consumers.

McComeback

Shareholders have cheered as McDonald's has gotten back to basics and revived sales

As it reported earnings on Tuesday, the company said global same-restaurant sales jumped 6.6 percent from a year earlier, the eighth consecutive quarter of gains on this measure. The streak looks especially remarkable given how gloomy things have been looking in the wider restaurant industry.

Weak Appetite

McDonald's has scored even as the restaurant industry overall has seen declines for much of the last year

Source: Bloomberg, MillerPulse

Shareholders have applauded the progress, pushing the stock near all-time highs. Now, as McDonald's moves on from turnaround mode, it would do well to heed some lessons offered by two retailers that are often located just across the parking lot from it. 

Just as McDonald's was able to revive sales by embracing simple changes to its core business, so, too, did the titans of the big-box world: Wal-Mart Stores Inc. and Target Corp.

A few years ago, when Walmart was in a rut, it doubled down on fundamentals. It emphasized making stores tidier and ensuring shelves were well-stocked. It raised employee wages, partly to improve customer service. It worked.

Target, meanwhile, regained momentum in 2015 by putting its muscle behind the cheap-chic clothes and home goods that initially won shoppers' loyalty. It added more enticing displays in its apparel and home-goods departments, and it was rewarded with stronger sales.

But Wall Street treats these two big-box stores very differently these days, favoring Walmart over Target. That's partly because Target's initial rebound hasn't been sustainable, with its same-store sales slipping into decline again. 1 But it's also because of differences in how each retailer is poised to compete in the digital world.

A Tale of Two Big-Box Stores

Wal-Mart's stock has risen this year, while Target's has slumped

Source: Bloomberg

In the past year, Walmart has come out guns blazing in the e-commerce fight. It has acquired promising upstarts such as Jet and Bonobos. Its head of e-commerce, Marc Lore, pushed it to offer free two-day shipping on most purchases, a direct challenge to Amazon.com Inc. It has dramatically expanded its online offerings. The payoff: a whopping 63 percent increase in digital sales in the latest quarter from a year earlier. 

Meanwhile, Target's steps on the online shopping path have been more timid, and its vision for the digital era less clearly defined.

In other words, both of these retailers got a boost when investors thought they had gotten their lumbering, legacy businesses in shape. But that only went so far. What happened next depended on how investors evaluated their steps to refashion themselves into online power players.   

McDonald's is now in a similar spot. Ronald McDonald's house is in order, but it's time for the company to adapt to the rise of digital ordering and delivery. 

Swipe, Tap, Eat

Nearly half of delivery or pickup orders were digital in 2016, up sharply from five years earlier

Source: NPD Group

McDonald's has long been a go-to for convenience-oriented diners. But thanks to delivery startups such as UberEats, Postmates, Seamless and GrubHub, a wider array of restaurants are now competing for such meal occasions.

Importantly, about 70 percent of McDonald's U.S. sales are made at the drive-thru window. Those on-the-go diners would seem to find delivery especially appealing.

Meanwhile, customers increasingly want to be able to place pickup orders from their mobile phones. McDonald's can't afford to be late in meeting those expectations. And a well-designed mobile-ordering system could help manage lines and increase sales productivity at its restaurants.  

McDonald's has outlined plans for addressing these shifts in consumer preferences. This year, it expects to offer mobile order and pay in 14,000 of its U.S. restaurants -- a sharp increase over the more than 400 locations where it was testing the technology as of April.

It's also expanding its pilot of delivery to more U.S. cities. It helps that McDonald's has some experience there: The chain already has a robust delivery business in some markets outside the U.S. -- in China, for example, delivery accounts for 10 percent of total sales.

Digital strategy is already starting to sort the restaurant industry into winners and losers. Just look at Domino's Pizza Inc.: Its sales growth and market capitalization are crushing those of rivals such Papa John's International Inc., thanks to its strength in online ordering.

Delivering Value

Domino's market value has soared as it has proven its digital mettle

Source: Bloomberg

If McDonald's wants to keep its share price cooking, it had better soon prove it has a recipe for digital domination.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. The company recently updated its guidance to suggest that comparable sales will be positive in the current quarter. 

To contact the author of this story:
Sarah Halzack in Washington at shalzack@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE