McDonald’s Makeover: 7 Things You Didn’t Know

A tour of newly renovated McDonald’s units around Tampa, Fla., revealed details of the fast food giant’s plan

McDonald’s has touted much about its plan to revamp most of its 14,000 domestic locations, ditching the bright colors and iconic roofs of the past for ultramodern interiors and exteriors.

However, a recent tour of newly renovated McDonald’s units around Tampa, Fla., revealed new details of the quick-service giant’s plan.

Securities analysts Larry Miller of RBC Capital Markets and Jeffrey Bernstein of Barclays Capital, who participated in the tour, noted not only the new facades, digital menu boards and fancy new seating, but also several operations-minded upgrades, including a new POS system and dual drive-thrus meant to speed service times and boost throughput. They also learned more about the costs involved in the reimaging plan.

Based on reports by the two analysts, here are seven things industry watchers may not know about McDonald’s undertaking:

1. Reimaging work also includes plenty of rebuilding

McDonald’s expects to upgrade 800 restaurants in 2011, including 600 reimages to interiors and exteriors as well as 200 total rebuilds or relocations, Miller and Bernstein wrote in their reports. The company completed 100 upgrades in the first quarter and is projecting another 100 in the second quarter, implying an aggressive expansion of the program in the second half of the year.

Miller, Bernstein and others toured reimaged units in Clearwater and Brandon, Fla., which required four to six weeks of construction to upgrade, as well as a rebuilt location with McDonald’s new interior and exterior flourishes in Seffner, Fla. The rebuilt restaurant opened in November 2010 after construction began the prior August. The securities analysts noted that either the dining room or drive-thru remained open throughout construction.

2. Not all restaurants will be revamped

Miller and Bernstein both said 1,800 locations of McDonald’s more than 14,000 domestic restaurants have the new look and feel, and there is plenty more opportunity for upgrading the system. About 6,100 units are candidates for reimaging and another 2,500 could be rebuilt or relocated, the analysts wrote.

However, nearly 4,000 McDonald’s locations will not be considered for remodels, Miller wrote. About 1,000 units do not generate sufficient volume to justify the investment, while another 2,600 locations are nontraditional units, like on-site restaurants in Walmart stores, which are not candidates for the program, he said.

3. Costs for reimages vs. rebuilds

The average cost to reimage a McDonald’s restaurant was $550,000, with a range between $400,000 and $700,000 depending on the location and condition of the unit, the analysts wrote. In these cases, McDonald’s Corp. contributed 40 percent of the cost of the remodel, or an average of about $220,000.

A restaurant needing to be rebuilt or relocated required more capital expenditures from both McDonald’s and its owner-operators. Those investments ranged between $1.7 million and $2.1 million, including about $1 million to $1.2 million from McDonald’s Corp. and about $700,000 to $900,000 from franchisees.

4. Impact on sales

Miller of RBC Capital Markets estimated that the reimage and rebuild efforts could add 50 basis points a year to McDonald’s annual same-store sales over the next several years. Both he and Bernstein of Barclays Capital wrote that a reimaged restaurant experienced an average same-store sales increase between 6 percent and 7 percent above the rest of the market in the first year, while totally rebuilt units had same-store sales increases between 15 percent and 20 percent.

“The rebuild we visited in Tampa cost a total of $2.4 million and saw average unit volumes rise from $4.1 million prior to the rebuild to $4.8 million today, a 17-percent increase, though we note the store has only been open for six months,” Bernstein wrote.

That 5,766-square-foot restaurant had 128 seats, he noted.

5. Revamps include operational improvements

The new interiors and exteriors at upgraded McDonald’s locations are crucial to creating the chain’s new look and feel, but some design updates also improve efficiencies and throughput, Miller and Bernstein both wrote.

For example, a new POS system being rolled out to all domestic McDonald’s units is a simplified, icon-based model that should cut down the time and cost needed to train crew members and increase speed of service, they said. Capacity also will be bolstered in remodeled or rebuilt units, using various kinds of seating — wood tables replace fiberglass ones, and the steel chairs of the past will give way to wooden chairs and stools, some with faux leather — to fit more customers without needing to increase the location’s square footage drastically.

The double drive-thrus at the three Tampa-area restaurants the analysts toured not only handled more volume with two ordering lines, but also increased accuracy with a system that photographs the driver and car of each order. McDonald’s said some restaurants would be able to move through an additional 50 cars per hour in incremental traffic during peak periods, Bernstein wrote.

6. International upgrades increase confidence

McDonald’s officials have shared in previous earnings calls that moves to refurbish restaurants in international markets, particularly Europe and Australia, have shaped McDonald’s strategy to remodel its domestic system. Miller wrote that Australia’s 800-unit system has grown sales since its complete upgrade and that sales of new products in Australia outperform sales in non-refurbished markets.

The improved décor has a positive menu shift in Australia, “allowing McDonald’s Australia to reshape itself for consumers and therefore sell more premium products,” Bernstein added. “Management expects the reimaging efforts in the United States to similarly allow for future flexibility.”

The Financial Times reported this week that McDonald’s European division would upgrade its POS system to self-service, touch-screen terminals that could read swiped payment cards and would replace many cashiers. McDonald’s Europe president Steve Easterbrook told the newspaper that the new payment systems are designed to shorten transaction times and to collect consumer data in the same way that supermarkets glean ordering habits from the use of loyalty cards.

7. Signage is what’s next

Bernstein wrote that signage, including the iconic golden arches making the McDonald’s “M,” would be the “next frontier” in the chain’s ongoing campaign to update its image.

“During our tour, we noted that even the reimaged restaurants had the old ‘M’ and outdated line-by-line product and promotional advertising,” he wrote. “With 50 percent of customers making their dining decisions while on the road, management believes it is crucial to modernize the signage, both aesthetically and technologically, including a digital board underneath the ‘M.’”

McDonald’s officials told Bernstein that such new signage is being tested in a few locations and that costs for that investment could range from $30,000 to $100,000 depending on the size of the sign and property, excluding the digital board.

— Mark Brandau

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