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.