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McDonald's Is Running Out of Room to Grow. Here's What's Next

By Daniel B. Kline - Dec 30, 2017 at 10:25AM

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The fast-food chain may not be able to profitably add many more restaurants, but it has found a way to grow comparable-store sales.

In the United States, McDonald's (MCD 2.34%) has reached a saturation point. The chain closed 2016 with 14,146 domestic locations, meaning that wherever you are, the Golden Arches probably aren't too far away.

In fact, while there are still countries where the chain has room to expand its footprint, many parts of the world have all the McDonald's locations they can support. That means that whatever growth it achieves will have to come from increasing its same-store sales.

For years, that seemed like it would be a difficult task, but now the fast-food giant actually has a tactic with real potential to increase comparable-store sales: delivery.

The exterior of a McDonald's

McDonald's has begun expanding its delivery locations. Image source: McDonald's.

What is McDonald's doing?

The fast-food segment has come to see delivery as a cure for the ills it has suffered due to the rise in popularity of fast-casual chains. It's not a solution that one would expect at first glance to work: Fast food doesn't travel well, making it a poor choice for delivery. But consumers seem to prize convenience over everything else.

That partly explains the ongoing success of Domino's (DPZ 0.05%), a company that has perfected the art of rapidly delivering mediocre pizza. The chain has made it incredibly easy to order and have its food delivered. That's the model McDonald's is following.

"Over the course of the past nine months, we've introduced delivery in over 5,000 restaurants across 20 countries," CEO Steve Easterbrook said during the chain's Q3 earnings call. "Along with the 3,500 restaurants in existing delivery markets across Asia and the Middle East, we now offer delivery in over 20% of McDonald's restaurants around the world."

Easterbrook expects McDonald's will offer delivery in 10,000 locations when 2017 ends. That's slightly over 25% of its nearly 37,000 restaurants worldwide. It planned to offer delivery in 5,000 U.S. restaurants by 2018.

Why is this important?

Delivery can lead to increased revenues. The chain has not provided hard data on this, but Easterbrook said during the Q2 earnings call that delivery led to "higher average checks." The potential for that to grow revenue across the chain is significant, given that the CEO noted that 75% of the population in the company's top markets lives within three miles of a McDonald's.

"In many of our markets around the world, we're seeing average check sizes between 1.5 and 2 times higher than our overall restaurant averages," he said.

In the U.S., McDonald's is delivering through a partnership with Uber. That keeps it from having to build out its own delivery network and holds its costs down.

The chain has an edge over many rivals since, like Domino's, it has invested heavily in its app, which makes it relatively easy to choose delivery, or get the curbside pickup, or order online to eat in the restaurant.

Making things easy for consumers has proven to be a model that works for fast food. It's also one that may be hard for higher-end chains to duplicate because customers seeking a better meal may not want to sacrifice quality for convenience.

McDonald's has the locations to make its delivery as ubiquitous as its physical presence. That's going to be a strong growth driver over the next few years, as consumers will almost always be able to have their Big Macs, McNuggets, and other Mickie D's treats delivered nearly anywhere.

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McDonald's Corporation Stock Quote
McDonald's Corporation
$248.52 (2.34%) $5.69
Domino's Pizza, Inc. Stock Quote
Domino's Pizza, Inc.
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