McDonald’s Is Evolving Its Approach To Value To Be More Personalized

McDonald’s reported a 3.7% comparable sales increase in the U.S. during the second quarter, while its global same-store sales jumped by nearly 10%.

These positive results come despite inflationary pressures not seen in 40 years; pressures that have kept a huge chunk of consumers (about 80%) from eating out as much as they’d like to.

Notably, McDonald’s Q2 sales growth was driven completely by higher menu prices. During this morning’s earnings call, outgoing CFO Kevin Ozan said menu prices are up “high-single digits” and are expected to remain in that range for the full year.

In other words, consumers continue to perceive McDonald’s as a value leader, which bodes well in challenging times like these.

Executives did note they are seeing some trade down activity, specifically from lower income consumers ordering more value offerings and fewer combo meals. But, unlike some of its peers, the company is taking smaller, more frequent pricing increases to ensure its value perception continues.

“(The approach) gives us the flexibility to be able to see how consumers are reacting and then adjust if or when necessary,” Ozan said.

Kempczniski added that McDonald’s continues to do well on metrics such as “good value for the money.” As such, the company is likely benefiting from external trade down activity, including consumers choosing the brand over cooking at home. Grocery inflation has outpaced restaurant inflation by nearly three percentage points.

“Food-at-home is increasing significantly faster than food-away-from-home. I don’t know what the impact from that is, but there is certainly some benefit we’re seeing from that,” he said. “In almost every market, we are leading among our peers for value per money standpoint. Even though we’re pushing through pricing, the consumer is tolerating it well and we’re still doing very well from a value score standpoint.”

Consumers’ value perception of the brand is only likely to increase as the company ramps up its digital business, including through its fledgling MyMcDonald’s Rewards program, taken nationally just last year. In Q2, digital sales in the company’s top six markets exceeded $6 billion, or about one-third of total systemwide sales.

A higher number of digital customers means more personalization opportunities for the brand, including personalized value.

“You have to think about value in a targeted way. As we get more digital, there are different products with different elasticities in different geographies. I get excited about the ability for us to be much more targeted in how we deliver that value,” Kempczinski said. “What we’re looking at doing is exactly which products do you need to offer value, to what degree and through what vehicle–an offer, a menu price adjustment or promotion?”

He added the concept of “value” is no longer a one-size-fits-all equation because of the opportunity digital provides in learning more about how customers access the brand.

“To get a sense of what the opportunity is (with digital), if you look at Germany, France, the UK, China, digital is over half of sales in those markets. In China, it’s over 80% of sales. That’s compared to the U.S., where it’s maybe a quarter of the sales. So, there is a big opportunity for us to increase digital as a percentage of sales,” Kempczinski said. “What happens when you do that is the percentage of identified customers goes up dramatically. That opens up a whole range of things, from service opportunities, pricing opportunities, etc. Digital for us, we’re starting to see the benefits, we just need to go harder and faster.”

This is contributing to what Ozan called the brand’s “evolution” of value. Historically, McDonald’s featured a national value menu. Now, menu pricing is primarily driven at the local level. That localized approach, he said, allows individual field offices to promote products that make sense in their markets and based on their competitive set.

“We’ll continue to have some national offers, but we’ve moved more toward a local approach which then becomes, ultimately, a personalized approach. We’re in the middle of that evolution–going from national to local to personalized,” Ozan said.

The benefit of transitioning to personalized value offers is to avoid sending promotions to customers who would otherwise be willing to pay full price.

“Go back maybe 10 years ago, we didn’t have the ability to deliver precision value and you would end up having a national deal that would hit everybody. There’s a lot of waste in that,” Kempczinski said.

McDonald’s was a winner on value perception during the Great Recession in 2008 as customers traded down from full-service restaurants. With grocery inflation added to the mix this time around, as well as a move toward “precision value,” the company expects to be a “net beneficiary” again.

“We know there is challenge on the lower income (consumers), but we are getting trade down out of full-service restaurants, getting trade down at fast casual, that’s helping offset any of that impact,” Kempczinski said. “While there is going to be some shifting within the cohort, our value positioning, we expect to be a winner out of all of that.”