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Digital Sales Drives Growth for McDonald's

By Parkev Tatevosian, CFA – Oct 29, 2021 at 7:04AM

Key Points

  • Digital orders are holding down the fort while in-restaurant sales recover.
  • McDonald's has more than 121 million active rewards members.
  • Operating profit margins are expected to reach the highest level in the decade.

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Sales through online sources for delivery and pickup are helping the company through pandemic disruptions.

McDonald's (MCD -0.82%), the largest quick-service restaurant globally, delivered double-digit revenue growth in its third quarter. Driving that growth is a robust digital offering that is getting the attention of customers worldwide. 

Digital sales also help relieve pressure on restaurant staff because they remove the need to have a person take an order and payment from a customer -- a feature that is increasingly important right now when businesses are reporting shortages of workers. 

A burger and fries on a cutting board.

Image source: Getty Images.

Holding down the fort 

In all, McDonald's reported total comparable-store sales growth of 12.7% in its fiscal third quarter. The metric measures sales growth in restaurants open for at least 12 months and excludes the effects of new restaurants' openings and closings. Sales are recovering as economies are reopening worldwide. McDonald's is recovering a portion of the lost business from folks going inside the restaurants to order and dine. That part of its business suffered the most from the coronavirus pandemic.

Thankfully, McDonald's has a robust digital channel holding down the fort while in-restaurant ordering and dining recovers. Indeed, in its top six markets, over 20% of sales came through digital channels in the first three quarters of fiscal 2021. Those would be sales that could have been lost to competitors had it not invested in the capability.

Impressively, McDonald's now offers delivery from 32,000 of its restaurants in 100 countries. That's up from just 3,000 restaurants five years ago. The move is helping The Golden Arches reach a broader customer base and serve those customers on more occasions than otherwise. For instance, a group of friends having drinks at home can order McDonald's for delivery when driving is not an option. Or a parent of young kids could find it more convenient to order a few Happy Meals for delivery instead of walking or driving to the nearest location.

McDonald's is encouraging the adoption of digital ordering, launching a new rewards program in the U.S. In the few months since launch, it has signed up 21 million members. The program is much more entrenched in another of its large markets, China, with a whopping 100 million active members.

Improving profit margin

In addition to attracting incremental revenue, the digital channel will relieve staffing pressure at McDonald's restaurants -- especially in the current environment, when the company is finding it difficult to sufficiently staff its locations. Shortages are so pronounced that many restaurants operate on reduced hours, and customer service levels are falling as it takes longer to fulfill orders.

Franchisees have reported raising wages by 10% and are still finding it challenging to attract workers. Working at a McDonald's typically pays at the bottom end of the pay scale. It's not surprising that an extra 10% is not encouraging a wave of applications. After all, there is a deadly virus in circulation.

And with less of a reliance on a person to take orders and process payments, it could improve profit margins. An app does not need to be paid by the hour to take orders.

That could be one reason management targets an operating profit margin in the mid- to low 40% range for fiscal 2021 and 2022. Notably, McDonald's has only achieved an operating margin of over 40% twice in the last decade (2018, 2019). It's no coincidence that expanding profit margins are coming as its digital capabilities are growing.  

Parkev Tatevosian has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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