McDonald's Corporation (MCD) Earnings Call Transcript & Summary

Okay. I think that's our queue to get started. I'm Sara Senatore, and I want to thank everybody who's joined us this morning. Of course, very special thanks to my guest, Chris Kempczinski, Chief Executive Officer and President of McDonald's. Since we are doing this virtually, I'm just going to make a few housekeeping announcements and then give a very brief introduction for Chris and McDonald's as I think neither really does need that. But before we begin the conversation, let me just make sure I check some boxes. [Operator Instructions] So please do go ahead, click the link now and start submitting your questions right away and we'll make sure to focus the conversation on what interests you. Please reach out to your sales contact or corporate marketing if you have any questions or are experiencing any technical difficulties. So on to the show. McDonald's Corporation franchises and operates fast food restaurants and has more than 38,000 restaurants serving burgers and fries in nearly 115 countries in the global restaurant industry. Our guest today, Chris Kempczinski, was named President and CEO of McDonald's in 2019. He previously served as President of McDonald's USA and before that oversaw global business strategy, business development and innovation upon joining the company in 2015. Chris has spent 20 years working in the food and beverage industry, so a tremendous amount of insights and expertise not just in McDonald's, but the industry, and I would say the consumer more broadly. So I expect to have a very rich and rewarding conversation here. So thank you for joining us, Chris.

I am going to jump in with a question of my own before we get to the audience questions. You have been the CEO of McDonald's for about 1.5 years, which has probably one of the more tumultuous 1.5 years, I think we've observed amidst a global -- unprecedented global pandemic. So maybe you could talk a little bit about what your strategy looked like when you took the role, how -- and how has that -- has that? And if so, how has that shifted since then, either as you think about kind of the current environment or more permanently. So I'll kick it off there.

All right. Thanks, Sara. And thanks for the invitation. So when I came into the role in 2019, as you said, November 2019, we were -- had several years of strong momentum behind the Velocity Growth Plan. So we came into that, and frankly, my orientation mindset from a business standpoint was really more about let's just keep doing what's working. And I think what was working for us was -- were a number of the elements of it, but certainly, EOTF was a big enabler of that, getting our restaurant estate modernized, a big part of that in the U.S. And then fast forward a few months later and we're dealing with the pandemic and everything that, that sort of unveiled on the company and the world at large. My thinking at that time was let's see how this plays out. And it's -- I don't want to just change the strategy until we have a little bit more clarity about what we think the world might look like post pandemic. Ultimately, it led to what we announced last November, which was Accelerating the Arches. I would say, it's an evolution, not a revolution, from the Velocity Growth Plan. And it evolved in probably a few important areas that I would just point out. The first is the Velocity Growth Plan was very much focused on service channels and product. And what it didn't, I think, make as prominent as I think we needed to was the brand and the importance of brand, both the corporate brand, what do we stand for as a company, what's our purpose and mission, the values that guide us as an organization, but also the flip side of how are we going to take this tremendous asset that we have, which is the McDonald's equity, and get more out of it. Because I think that, for us, has been something that, quite honestly, we probably haven't fully mined as well as we could have. The other thing was a pivot from what was, I would say, heavily weighted dine-in orientation that we had with the Velocity Growth Plan to more of a dine-away, and that came in the form of certainly drive-thru, but also delivery, an increased focus on digital. And so ultimately, as you know, that led to our Accelerating the Arches plan with the MCD moniker of marketing, core menu and the 3Ds. That's going to be what guides us as we now hopefully get back to a little bit more normal world and one that we think has a lot of opportunity for us.

Yes. That makes -- I think that's a great summary. And I guess I do want to talk a little bit about what you think the normal world looks like. But maybe we could go into a little bit more depth about the brand and the emphasis on the brand and what that means and what that looks like and where you think capitalizing on the brand or doing more of that is visible in both -- to the observer and consumer and also perhaps investors.

Sure. I'll talk about it in both dimensions, the corporate brand and the consumer-facing brand. And again, there are 2 sides of the same coin. But I think what we've seen, certainly, it became an even more important element during the pandemic is that customers, our employees, people associated in the McDonald's system, they want to make sure that the business that they pay -- that the company that they work for, that it reflects the values that are important to them and that they feel good about that. And I think also you're seeing more broadly, expectations of corporation are largely having to fill a void left by other institutions like government. And so there is a change that is -- and many years in the running, I think the pandemic has even further accelerated an attention being paid toward ESG types of topics broadly. And then even more specifically, what exactly is McDonald's purpose and mission going to be. Why do you matter as an organization? So that was something that I thought we needed to do a better job of more clearly articulating it, led to our focus on being a provider to communities, the fact that we have almost 40,000 restaurants, we think of those as 40,000 community centers. So how do we activate that in a deeper way? And then also getting clear about where McDonald's could make a difference on the broader ESG landscape. And for us, there were 4 areas there. One was in the whole topic of supporting local farmers, local ranchers. We think that, that's something that we are uniquely positioned to be able to do. Jobs and opportunity, we think we are uniquely positioned in creating jobs and opportunities, the whole sort of America's best first job, it's the nature of our system. Third for us is being there for communities in times of need, like we do with our 350 McDonald -- Ronald McDonald houses around the world, and then, importantly, making sure that we are doing our part to help combat climate change. So that was the corporate-facing side. On the consumer side, I felt just that we had a tremendous untapped reservoir of goodwill that existed with customers that we had not mined. And I think we also had a degree of cultural relevance that we had maybe just let get stale a little bit. And so how do we reengage with the kind of inner fandom that exists in all of our customers? And how do we become back in part of the cultural conversation? I think what you're seeing in the U.S., and it's actually now in 50 countries with the BTS Famous Orders meals is an example of how we bring that to life. It's an example of how we tap into this insight of everybody has their favorite McDonald's order even if you're a famous band like BTS, and then using our various platforms like digital, like our marketing, like our great food to bring that to life. And I've been excited to see how quickly it's actually come back a little bit more quickly than I thought it would, just consumers' interest in having McDonald's be part of the cultural conversation. So our marketers -- these things tend to have a momentum to them once you get us a market doing at another market cycle, what's our big idea going to be. So we've now got to keep that going.

Yes. I think the work you did with BTS or J Balvin and Travis Scott, I mean, was to me a stroke of genius, just because, as exactly what you said, it sort of underscore the relevance without, I think, adding really complexity to the menu or require new SKUs or anything like that. So I think we've all seen that. We've seen the impact on same-store sales certainly. So that certainly is evidence of the success of that. Maybe we can talk a little bit about this idea of wanting McDonald's to be part of the conversation. You touched a little bit on this idea of 40,000 community centers. And how do we reconcile that? Or how do we juxtapose that with this idea of off-premise kind of consumption that we're seeing where, to some extent, there's just less perhaps engagement with the physical plant of the restaurant and maybe even with the people in the restaurant because we're seeing so much more digital ordering, remote ordering, that type of thing. So how do we think about the value of brand? And also maybe just if you could talk about how much of that trend do you think is here to stay? This idea of the off-premise, the digital ordering, and that whole modality engagement.

I think dine-in is always going to remain an important part of the McDonald experience. For me, this is sort of almost just a human nature type of thing. I think we are inherently social beings. And I think food is inherently a social occasion. And so people getting together over food, doing it in a good environment, a welcoming environment like we offer in the McDonald's restaurants, I think that's always going to be part of the experience. It does have a geographic element to it. So for example, in Europe, you see a much more pronounced dine-in part of the business than in the U.S., for example. And I think those relative geographic splits are probably going to remain roughly the same, meaning that Europe will always be a bigger dine-in market than the U.S. or Asia. But I do think you touched on the other part, which is dine-in, while it will always be important, it may not be at the same level that it was prior to the pandemic. And I think a variety of reasons for that. Certainly, the growth of delivery has been one of those. I think it also -- it has pushed everybody to step up their game from a digital standpoint. And I think consumers are recognizing that digital can solve some real needs, particularly around convenience and being able to sort of look for your favorite items without having someone sort of waiting to key it in there. So I think there's a number of benefits that come with digital. For us, as we think about how do you reconcile that, as you were saying, with the physical plant, to me, this is about being omnichannel. This is about you've got to be able to offer that seamless experience where the digital McDonald's experience feels fully integrated with the physical experience. And that's what we're focused on right now. So that when you're going through, you don't feel like it's 2 different McDonald's. It all has to feel like it's part of the same experience. And we've got, I'd say, the foundation on top of it or foundationally, but I think there's a lot we need to put on top of it to still make it even more convenient, even more seamless and to ensure there is the fun that carries through. Why can't the same fun that maybe you're having in the app come to when you show up in the restaurant? And I think a part of this is also being able to recognize the customer when they come to the restaurant. And so for us, loyalty and getting that deployed is a key enabler to ensure that today, 95% of the customers that come to the restaurant, we have no idea who they are. Imagine if in the future we could know, let's say, 50% of them. It just -- it creates an entirely different brand experience. So that's what we're focused on going forward and do see the 2 working together.

Yes. I have a couple of questions from the audience that I think are, to some extent, either tangential or related to this. I'll try to weave them in. You did -- you talked about there are cultural differences between Europe and I think -- and the U.S. And obviously, we've already seen much higher dine-in businesses. But one of the questions that has shown up is, are you seeing any impact on drive-thrus from less people commuting, more people working remotely? And what is the strategy to offset that? I think during the pandemic, in fact, the biggest increase in dollar sales was actually through your drive-thru, if I recall correctly.

Yes.

But maybe we could talk a bit about use case or how that changes and again whether you think that fully comes back to that sort of 70% drive-thru mix or it stays somewhere, maybe not 90%, but somewhere in between?

Yes. Yes. Well, I'll start with the U.S. I mean the drive-thrus in the U.S. are cranking. And one of the things that's been, I think, really helpful for us is the fact that we have 95% of our restaurants with the drive-thru. It's proven to be a very safe sales channel that customers have been able to go through. And I've been proud about how the U.S. team and our franchisees there have actually been able, despite a lot of volume going through the drive-thrus to get service times to be improved. So that, for us, has been, I think, a very pleasant surprise. We've discovered capacity that, frankly, we didn't realize that we had. I think the flip of it is your use case, we are seeing the orders are much bigger orders. And so I think you are seeing now, for example, in drive-thru the traditional measure of traffic, guest count is down, but the average check is up by a pretty substantial level. And our sort of inference from all of that is its people typically with either the family in the car or they're bringing it home to the family. And it ends up being sort of a larger group occasion than maybe in the past where it was for an individual occasion. So that's been something that we're definitely seeing right now. We don't expect that, that's going to continue at the same levels. I think over time, you will see the average check diminish. That will have the other side benefit though of you'll start to see traffic pick up through the drive-thru. So whether it gets all the way back to where it was, I don't think we're planning on it getting all the way back, but I also don't think it's going to stay anywhere near the current levels. And all of these things, ultimately, I think, will work themselves out to probably being, if I were to guesstimate, maybe 5% more of the mix moves to -- away from the restaurant. But again, in many markets, including the U.S., dine-in will still be an important part of it.

Right. Okay. That's helpful. In the -- so in the interest of, again, try to get to as many audience questions as possible, I'm going to ask a bit about breakfast, because I think that is the daypart probably most germane to that question that just got asked and this idea of working from home. One of the things that we've seen is that McDonald's breakfast business is actually, and you say, let's say, if not turned the corner, certainly we've seen a change in the trajectory after having a few years of lagging the rest of the dayparts. Do you -- to what do you attribute that? And I will tag on this audience question, which is, is this idea of pandemic-driven market share gains over segment to the extent that we have seen capacity come out, or you have been able to benefit from some of the competitors not being as adept or not being able to pivot as quickly, how permanent is that? So I know there's a lot wrapped up in there, but can you just talk about all the...

I'll give it my best shot, and then if I miss something, you can come back and remind me. But I guess I would start first with we were gaining market share as a system before the pandemic. We had several years certainly dollar share market gains in the U.S. and globally. Outside of the U.S., almost every other major market was gaining traffic share in addition to dollar share. So we were in a share gaining mode pre pandemic. I think the pandemic allowed us to gain even more share for the reasons we talked about earlier around drive-thru, et cetera. So I think that, that's certainly been helpful to us. But as we think out over the next couple of years, at least as we're building our plans and talking with the market teams, we're not letting anybody off the hook in terms of presenting a gain share plan. So we think we should be continuing to be able to gain market share, primarily right now focused on the dollar market share and not being as precise on what the traffic share recovery will look like because more broadly, we're not sure what traffic will look like from an industry standpoint. And so there's a degree of uncertainty with that. As you mentioned in breakfast, we did see solid growth in breakfast, both in 2020. We had good breakfast growth in the U.S. in Q1 of 2021. A lot of different elements to it. I think, certainly having drive-thrus to be faster has been helpful because breakfast is probably the most time-sensitive, convenience-oriented daypart. So being faster in the drive-thru does help your breakfast business. We also had some new items like baked goods that we introduced that I think were also helpful for us there in it. And then just, I think also for us, focusing on having it be part of our marketing mix that we're putting weight against it, we're not just taking advantage of it. So a lot of different -- or taking it for granted. So a lot of different things that we're working there. And I do think breakfast is going to continue to have more pressure as a daypart because McDonald's, like every other company, is talking more about hybrid work. And perhaps you might see people now only working in the office 3 days as opposed to 5 days. I think that may be something that does exist as a permanent post pandemic sort of new way of working, which will have perhaps a ripple effect on the breakfast business. But our mentality is we do think we've got a great breakfast business, and we want to be gaining share there.

Okay. Since we're on the topic of the workforce, let me ask this. This is the most upvoted question. Unemployment is still high, but we're seeing reports of businesses having trouble hiring. Are you seeing a cost impact here? What's the solution? And how does that look in terms of the balance between losing a lot of restaurants provide incentives or are there ways to streamline some of the processes in terms of ordering and that kind of thing?

Sure. Well, definitely in the U.S. and several of our other major markets, we're seeing a real challenge on the staffing front. Interestingly, the challenge is more about applicant flow than it is turnover. So it's not that you're seeing a big step-up in turnover versus what was out there at pre-pandemic levels. It's the applicant flow is down pretty significantly from what we saw pre pandemic. And there's a lot of different reasons and I would say theories that you've heard about that. I think probably my view is it's a combination of all the above. So you do have the fact that some people are still feeling that it's not safe to go back to the workplace. And so I think there's a group of people that perhaps are a little bit reluctant to reenter the workforce. I think also, you have everybody is in a hiring mode right now. So everybody is trying to reopen and everybody is out there staffing. That's another. The fact that you're seeing -- there's stimulus benefits that were out there for many people, I think that also has had somewhat of a depressive effect on applicant flow. And I think, lastly, you are just seeing that wages, in general, there is wage inflation that's occurring across the industry. A number of reasons for it, but I think it's driven largely by just people you need to be able to pay higher wages to get the people that you need. We announced -- as you know, a few weeks ago in the U.S., we did a 10% raise for all our company employees working in our restaurants. We now start people working in as crew in our restaurants anywhere from $11 to $17, depending on what part of the country they're in. $15 to $20, if you are a restaurant manager. And that's just what you need to be competitive when a Walmart or a Target or a CVS or whoever are also offering $15 an hour or have a pathway to it. So a lot of different things going on. Our hope and certainly what we are working with our franchisees is that in the back half of the year, it becomes a little bit more -- a little easier of a hiring environment. But I think some of the macro trends that you saw which were wage inflation, high demand from a lot of retailers looking for people, I think those are going to persist for quite some time.

Right. Okay. Yes, I think, over time, certainly, maybe the acuteness of the labor shortage in the near-term dissipates. But to your point, these are things that we're going to be thinking about for a while, which is why I'll ask a couple of questions. One is, you mentioned franchisees. One of the questions here is, can you talk about both franchisee economics and your relationship with franchisees? McDonald's is always in the spotlight, I think, both for financial press and just general press. Everybody cares about McDonald's. So maybe talk a bit about what that looks like with system -- with the system.

Sure. So let me start with, we have globally about 4,000 franchisees. So it's always a little bit challenging to talk in generalities about where franchisees are because there's 4,000 of them. And depending on if you're a franchisee in Europe or Asia or the U.S., you may be having a very different experience with whether your business or what's going on at the local level. But if I go and maybe focus on the U.S., which is my guess is where the genesis of that question was, in the U.S., we have 2,000 franchisees. Overall, their financial health is very strong. So if you look, 2019 was a record cash flow year. 2020 then became a record on 2019. 2021 will be a record on 2020. So 3 consecutive years, I think we can confidently say of record cash flow levels. And that's even pre-PPP. So there was also a significant PPP benefit that our franchisees enjoyed that's not even included in those numbers. So there is a lot of dry powder that exists in our system, which is a great position to be in because it means that we're going to be done with all of our EOTF remodels by 2022. We're about 90% of the way there. We'll kind of get the rest of them basically done in 2022. And you're seeing franchisees trying to buy other restaurants from franchisees at pretty healthy multiples right now. So you're seeing multiple expansion on top of a record cash flow, which I think gets to franchisee sentiment of being very optimistic about the business. That said, you referenced the media, there are always things that go on in the nature of the back and forth between franchisee and franchisor that make for good headlines. We had a few of those at the end of last year that spilled over into this year around things like tech fees and Archways program and Happy Meal rebates. In the grand scheme of things, those are rounding errors in the overall financial health of franchisees. And I think it's more to just recognize, there always is a push and pull that exists between franchisee and franchisor. And I've said, we'll resolve these issues. But if you have me on in a year from now, I'm sure there will be a new set of issues. And that's just -- that's the nature of the business. That's the nature of a relationship. It keeps both of us on our toes, let's just say that.

Right. And look, the franchisees are independent operators. And this is, I think -- there are puts and takes there, but I think the McDonald's model of having these owner operators has always been a factor at least in the success of...

Absolutely.

So let me -- you mentioned tech fees, but also one of the things that I want to talk about was technology. The question -- actually, the question about the labor market did have a component about automation. Are there things that you can do to make, let's say, I'll characterize as making the people in the restaurants more productive. So can we talk a little bit about what kind of investments you're making there? What that looks like? Because I think, yes, it's always -- people always like to talk about the things that the customer sees, the app, the mobile ordering, even the aggregators, but sometimes it's the back of the house, behind-the-scenes tech that is actually making a big difference. So maybe you can talk a little bit about that and weave that into G&A, if you will, since those are the questions that we're getting.