McDonald’s Faces a Tantalizing Dilemma

McDonald’s might be on its way to significant technological advancements, which could lead to increased sales, but it's not going to be easy for one key reason.

Jan 10, 2014 at 10:00AM

McDonald's (NYSE:MCD) recently made a move that you're likely not aware of. This move might indicate added convenience in the future, which has the potential to increase foot traffic and sales. It's also a move that might increase Millennial demand, which is a target market that McDonald's fears losing. The problem is selling this technology to McDonald's franchisees.   

A one-location test
Unless you live in or near Laguna Niguel, California, you likely never used an iPad to place an order at a McDonald's restaurant. At this McDonald's location, you can order from an iPad at every table in the restaurant. However, McDonald's has no definitive plans to build out with this innovative measure as of right now. It's using the Laguna Niguel location as a test. 

If the iPads succeed at this location, then you should expect McDonald's to aim for related technological advancements, such as kiosks, in order to speed up the ordering process, which would add convenience for consumers.

McDonald's added 7,000 kiosks to it McDonald's Europe locations in 2011. These kiosks weren't implemented to reduce head count. Rather, they were implemented for added convenience. At the time, McDonald's stated that it wouldn't cut employees because not all customers are comfortable with technology, and employees would be needed to help these customers place orders. Customer Order Displays were also added to the early part of drive-thrus, so customers could place their order earlier and check the display to make sure it's correct.  

What's the problem? In the United States, 90% of McDonald's restaurants are run by franchisees. Franchisees recently had to shell out a lot of cash for McCafe equipment, remodels, as well as a new cash register system. If McDonald's were to add kiosks to domestic locations, it would cost franchisees $4,000 per kiosk. That's a steep hit following elevated expenses. Additionally, 75% of McDonald's sales stems from the drive-thru. Therefore, franchisees aren't going to be eager to add kiosks anyway. 

What's most interesting here is that smaller chains, such as Jimmy John's, Potbelly, and Wow Bao have added kiosks and have seen success. In the case of Wow Bao, kiosk orders are 15% higher than traditional orders. In addition to this, McDonald's knows that the Millennials -- a key market for future growth -- wouldn't mind the technology and would appreciate the convenience. 

The dilemma: McDonald's wants to add convenience and keep pace with technological advancements being seen at other quick-service restaurants, but its franchisees aren't likely to approve of such an investment at the current time. 

Ahead of the curve?
DineEquity (NYSE:DIN) and Brinker International (NYSE:EAT) have made similar moves as of late.

DineEquity's Applebee's has partnered with E La Carte, and Applebee's plans on having an E La Carte tablet at every table in every one of its restaurants throughout the United States. These tablets allow customers to order, pay, and play games. Applebee's has stated that there will be no changes to its staffing this year in relation to this change. This should be expected, as any immediate employment-related moves could lead to public backlash. Over the long haul, Applebee's is likely to cut costs through its workforce because of these tablets. 

The same can be said for Brinker International's Chili's restaurants. Chili's uses Ziosk tablets, which compete with those of E La Carte. Chili's has stated that it doesn't look to cut costs through employment in relation to its new Ziosk tablets. Rather, it states that the tablets will lead to increased revenue, primarily in relation to impulse orders, but I would still be surprised if Chili's employed as many people as it does today five years from now. Casual dining restaurants haven't been as consistent on the bottom line as McDonald's. 

The Foolish takeaway
Applebee's and Chili's might see future improvements thanks to their new technological advancements. On the other hand, casual dining is hurting. Aside from the high-end consumer, most consumers are finding it difficult to make ends meet. Therefore, these consumers are more hesitant to dine at Applebee's or Chili's than they were in the past.

McDonald's caters more to the value-conscious consumer. Therefore, if McDonald's can find ways to use these new technologies to its advantage, it would lead to increased sales potential. The dilemma as discussed above is catering to Millennials (as well as other customers) vs. upsetting franchisees. However, iPads at the Laguna Niguel location are being used as a test to see how customers respond. If proven to be a success, then you should expect to see more iPads or kiosks at McDonald's restaurants in the future, perhaps down the road so franchisee expenses don't increase too rapidly. From an investing perspective, this is a long-term catalyst, but getting in early never hurt. That said, keep an eye on news related to the test location.

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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Apple and McDonald's. The Motley Fool owns shares of Apple and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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