Watch out, Starbucks
McDonald's recently announced a $1 billion revamp of existing U.S locations, some 90% of which are owned by franchisees. Highlights of the refurb include more muted interior colors, wooden furnishings, flat-screen TVs, and less fluorescent lighting. Those are all interior touches to make its locations more habitable.
But even as it's making those investments, the company hasn't forgotten that it's a key eat-and-run destination. So it's also adding double drive-throughs at some locations to speed up service.
This investment mimics the bifurcated strategy -- the so-called barbell strategy -- that fast-food operators are taking with their fare. By offering better food, restaurants such as McDonald's and Wendy's are trying to counter the threat posed by more upscale operators like Starbucks, Chipotle
But will it work?
McDonald's has been one of the strongest restaurant operators around for many years, and the company has worked to allocate capital effectively since its turnaround in the early part of the last decade. Early reports suggest that the reinvestment has led revamped stores to a 6%-7% faster sales gain than the average store in the first year. Another benefit: Franchisees will pick up a significant portion of the tab, while McDonald's continues to own much of its own real estate and buildings.
A strong focus on sensible reinvestment has helped the Golden Arches pump out massive dividends, and that's one of the reasons I own shares of the company. With this recent series of reinvestment, I'm hopeful that the dividend party can continue.