The manager of the McDonald’s in your town could soon have to place an exceptionally costly wager.
McDonald’s (MCD) estimates that a traditional U.S. drive-thru restaurant will need $800,000 to invest in Restaurant > NEXT, one of McDonald’s four initiatives that together make up its McDonald’s > NEXT new business strategy. The money would fund AI ordering, automated inventory, kitchen improvements, order-accuracy tools, and restaurant redesigns.
McDonald’s thinks such improvements will ultimately speed up service and increase the profitability of restaurants.
Some franchisees are not persuaded.
Operators have raised concerns about taking on additional debt, the amount of detail available about the rollout and whether the investment will generate enough additional sales to justify the cost, Bloomberg reported.
This conflict is significant since independent local owners run around 95% of McDonald’s more than 46,000 locations. McDonald’s may create the next iteration of the Golden Arches, but in the end, thousands of franchisees must make the business viable at the store level.
This elevates the franchisee reaction above an internal dispute for investors. In order to translate an ambitious corporate goal into real sales growth, McDonald’s requires the cooperation of these local operators.
McDonald’s is asking franchisees to make an $800,000 bet
NEXT is much more comprehensive than a conventional restaurant makeover.
McDonald’s intends to implement automated inventory, order-accuracy scales, predictive maintenance, an AI drive-thru ordering assistant named Archy, and modifications to kitchen and beverage operations. McDonald’s says Archy has over 90% accuracy in English and Spanish and could save at least 50 labor hours per week. McDonald’s says automated inventory can reduce food waste by 15% and save five labor hours per week.
Instead of just replacing tables or repainting the dining area, McDonald’s is essentially pushing franchisees to embrace a new approach to store management.
The company expects 250 basis points of gross restaurant-level efficiency improvement from the investment. McDonald’s estimates that its average U.S. restaurant will receive $100,000 in gross annual cash-flow benefit, most of which will boost its bottom line.
That looks like a good idea in theory.
However, an operator borrowing money now and hoping those advantages materialize is not the same as a spreadsheet that shows what a restaurant may save in the long run.
The push-back starts there.
Franchisees have another problem: customers are coming less often
McDonald’s investment push timing might be just as crucial as the pricing.
McDonald’s said that lower comparable visitor numbers somewhat offset higher average checks and a better product mix in the second quarter, which saw just a 0.8% gain in U.S. comparable sales.
In other words, while fewer transactions were passing through the restaurants, the patrons were spending enough to maintain sales growth.
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When you consider yourself in the position of a franchisee, that difference becomes important.
When lines are becoming longer and sales are increasing, it is simpler to accept an investment of $800,000. When customers continue to be price-sensitive and operators are already seeing a softening of client traffic, it becomes more difficult.
Restaurant Dive reported that some franchisees were surprised by the cost and wanted more clarity about the sales increase the program might deliver. Operators were also concerned about taking on additional debt while restaurant traffic remained challenged.
Bernstein cut its McDonald’s price target to $250 from $295 on Oct. 8 while maintaining a Market Perform rating. The firm said McDonald’s longer-term margin opportunity remained compelling but described the path to stronger sales as unproven, according to TipRanks, citing TheFly.
Bernstein and others wonder how quickly NEXT will boost sales. Restaurant Dive reported that BMO Capital Markets analyst Andrew Strelzik said McDonald’s had not yet provided enough detail on investment timing, spending, and new platforms to give investors a clear path to comparable-sales growth.
McDonald’s says it will help shoulder the cost
The $800,000 amount requires a crucial qualification: McDonald’s does not anticipate that franchisees will take up the full program all at once or all by themselves.
Through 2036, McDonald’s intends to provide NEXT partnership assistance totaling around $8.5 billion, of which about $5 billion will come via capital support and rent reduction by the end of 2030. It is anticipated that between $1.5 billion and $2 billion of the first round of funding will come from direct financing partnerships intended to hasten the adoption of Restaurant > NEXT.
Additionally, the investments will be made gradually.
McDonald’s Global CFO Ian Borden said restaurant-design work would follow normal remodeling cycles, while technology, kitchen, and operational changes would be implemented as they become available. That allows franchisees to spread the investment rather than pay a huge bill upfront.
After McDonald’s partnered assistance, the initiative is expected to pay franchisees back in around four years, according to the firm.
In management’s view, this is likely the most significant figure.
The $800,000 figure becomes considerably less concerning if an operator can invest in technology now, increase worker productivity, and ultimately recoup the expenditure in around four years.
However, execution is still necessary for that computation to be valid.
Artificial intelligence must function reliably. Changes in the kitchen must increase throughput. An improved experience must be noticed by customers. Additionally, for efficiency improvements to be significant, restaurants still need a sufficient number of patrons.
In my experience following restaurant stocks, that last part is often the easiest piece to overlook. Cutting costs can improve restaurant economics, but a chain cannot permanently save its way around customers visiting less often.
McDonald’s appears to be aware of that.
New chicken items, a larger beverage lineup, customized loyalty programs, and updated marketing are all part of NEXT, which aims to increase client visits rather than just lower the cost of serving current ones.
What McDonald’s investors should watch next
The opposition from franchisees does not indicate that NEXT is failing.
McDonald’s is still in the early stages of a multi-year rollout, and to improve the economics management is investing billions of dollars.
However, the dispute highlights the main problem with the strategy.
McDonald’s is urging franchisees to make significant investments because management thinks they can increase store productivity and encourage more regular patronage.
Before completely accepting the first element, operators appear to be requesting further proof of the second.
That is the number I would watch.
The present worries may soon disappear if U.S. visitor numbers start to rise and early NEXT outlets show the $100,000 yearly cash-flow advantage McDonald’s is aiming for.
No matter how advanced the technology, an $800,000 modernization program becomes much more difficult to market if traffic stays low.
McDonald’s shares closed at $235.23 on Oct. 9, after ending Sept. 23, the day the company detailed NEXT at its investor event, down almost 5%, at $238.32.
Therefore, shareholders are not concerned about whether McDonald’s can afford an $8.5 billion assistance program.
It is able to.
The more crucial issue is whether thousands of small restaurant owners think the patrons entering their establishments will justify the expense.
This places a unique challenge at the heart of McDonald’s comeback: before Wall Street can fully embrace NEXT, McDonald’s may need to persuade the people who run the Golden Arches.
Related: McDonald’s could soon unlock a major revenue stream
