When it reported full-year 2019 results, McDonald's (NYSE:MCD) had a nice comparable-sales surprise for investors. The comparable-sales metric measures revenue at restaurants that have been open longer than a year and serves as a good indication of a brand's popularity with diners. For 2019, McDonald's' U.S. comparable sales increased 5% -- its best results since 2006 -- and worldwide comparable-sales growth was even stronger at 5.9%.
McDonald's deserves credit for driving comps higher in 2019, but these stellar results came with a major asterisk: U.S. traffic was actually down 1.9% for the year, and new CEO Chris Kempczinski said fixing this problem is the company's greatest priority in 2020.
What drove comps growth?
The first thing driving comparable sales for McDonald's is delivery -- a major theme for the restaurant industry in 2019. The company reported over $4 billion in 2019 delivery sales worldwide. Generally speaking, delivery drives comps growth in two ways. First, it can increase how many customers the company serves, since it's not limited by restaurant seating or drive-thru throughput. But in McDonald's' case, delivery also contributed to a higher average check. That's because customers have to pay delivery fees, and the fees are steep if you're just ordering off the value menu, so it makes sense to justify the cost with a larger order.
The second factor driving McDonald's' comparable sales is self-ordering kiosks. Perhaps ordering at a kiosk allows guilt-free purchases, but whatever the reason, these kiosks also result in a higher average check. Kiosks aren't unique to McDonald's; in the second quarter of 2019, Wendy's said it had around 400 kiosks in company-owned locations that were also driving higher checks. The difference for McDonald's is it has kiosks at nearly all of its U.S. locations, so the positive effect is more noticeable.
The third thing driving McDonald's' comparable sales is Dynamic Yield's artificial intelligence technology. McDonald's acquired Dynamic Yield in 2019 and has implemented the tech at more than 11,000 drive-thru menu boards. The technology suggests menu items based on many factors and appears to be working. Management said customers are buying more add-on items, resulting in a higher average check.
What can be done for traffic?
A 5% comparable-sales increase, especially for a restaurant chain the size of McDonald's, is a praiseworthy feat. Still, it's fair to be concerned over U.S. restaurant traffic -- down 1.9% and 2.2% in 2019 and 2018, respectively. Here's three things investors should monitor in the coming year as McDonald's addresses the problem.
Kempczinski said that McDonald's has "to win at breakfast," but that meal is getting more competitive. In September 2019, Wendy's announced it was joining its fast-food peers by launching a breakfast menu in 2020 that's expected to add 6% to 8% to total sales. Interestingly, Kempczinski noted that overall breakfast traffic isn't growing for the industry. Therefore, for McDonald's to grow breakfast sales, it will have to steal share from competitors, and avoid losing share to the likes of Wendy's.
That ties directly into the next thing that can drive restaurant traffic for McDonald's: In an increasingly competitive environment, the key differentiator could be value pricing. McDonald's is known for being a cheap option, but even still, some of 2019's comps gains came from menu price increases. If the company starts a promotional-pricing war to earn more restaurant traffic, menu price increases won't be as easy in 2020.
Finally, McDonald's is focusing on drive-thru speed. The company is aiming to shave 20 seconds to 30 seconds off of wait times in 2020. It made good progress in this area in 2019, notching 15-second and 20-second year-over-year improvements in the second quarter and third quarter, respectively. Around 70% of McDonald's' U.S. sales come from the drive-thru, so it's easy to see how improving throughput could boost traffic.
When McDonald's says that something is its top priority, it's imperative to pay attention. After all, if it can't accomplish its highest goal, how reasonable is it to expect it to reach its lesser aspirations? Therefore, in 2020, I'd recommend keeping tabs on the U.S. traffic issue, specifically in the areas discussed here.
That said, a 1.9% drop in U.S. restaurant traffic needs to be kept in context. Worldwide, restaurant traffic was still up 1%, so it's not time to push the panic button. Rather, investors should view 2019 as a great year for McDonald's, but to build off of that great year in 2020, it will need to focus on the specific issue of U.S. restaurant traffic.