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McDonald's (NYSE:MCD) has ambitious expansion plans to open approximately 9,000 new outlets and increase its loyalty program membership by 100 million over the next four years. These goals are crucial to the company's strategy to enhance revenue growth.
For 2024, McDonald's anticipates a 4% increase in net new restaurants. The company expects that these new outlets will drive around 2% of its systemwide sales growth next year. Post-2024, McDonald’s aims for an annual growth rate in restaurant count of between 4% and 5%, with new locations projected to contribute 2.5% to systemwide sales growth during this time.
To facilitate these growth objectives, McDonald's plans to allocate $2.5 billion to capital expenditures in 2024, an increase from the $2.3 billion earmarked for 2023. From 2025 to 2027, capital expenditure is expected to rise by about $400 million each year.
The fast-food giant is targeting a global presence of 50,000 restaurants by 2027. At the end of the third quarter, McDonald’s had 41,198 restaurants. The question arises as to which regions will be critical to this expansion.
Over the next four years, the breakdown of new McDonald’s locations is as follows:
- 900 new restaurants in the U.S.
- 1,900 in international markets.
- 7,000 in its International Developmental Licensed (IDL) markets division.
The international markets, including France, Canada, and Australia, contribute 50% of McDonald’s total sales. Notably, the IDL segment, with a significant focus on China, is expected to account for over half of the new restaurant openings.
Risks associated with MCD’s aggressive expansion plans
McDonald's ambitious growth strategy is set against a backdrop of global economic uncertainties. McDonald's faces challenges with China, the fast-food chain's second-largest market, still recovering from pandemic impacts and instability in the Middle East affecting sales. Moreover, while the U.S. economy is not yet in a recession, some experts anticipate a downturn.
Here are three significant risks McDonald's must navigate as it enters 2024:
The Vulnerability of Low-Income Customers
Earlier in the year, CEO Chris Kempczinski anticipated a mild to moderate recession in the U.S. and a more severe one in Europe for 2023. These forecasts have yet to materialize. Kempczinski acknowledged his misjudgment, noting the resilience of consumers but also pointing out the reduced spending among low-income customers last quarter. Retailers like Walmart (NYSE:WMT) also observed this trend.
Although McDonald's often benefits when higher-income consumers opt for more affordable dining options, the low-income segment remains a crucial part of its customer base. Bernstein analyst Danilo Gargiulo expressed concerns over the financial well-being of these consumers.
Competition's Promotional Tactics
Post-pandemic, McDonald's moved away from temporary menu items to attract customers, focusing instead on brand marketing, such as promotions featuring celebrities' favorite orders. This strategy has been successful despite inflationary pressures. McDonald's spends substantially on marketing, significantly more than its closest rivals.
However, with low-income diners visiting less, competitors might increase promotional activities to attract traffic. This could lead McDonald's to weigh the benefits of short-term traffic against potential long-term brand impacts. Citi Research analyst Jon Tower speculated how McDonald’s might adjust to a more promotion-driven market.
Risks in Aggressive Expansion
McDonald's investor presentations highlighted accelerated expansion plans, aiming for 50,000 global locations by 2027. However, past experiences show that rapid expansion can have adverse effects, such as cannibalizing sales at existing locations and distractions from other business aspects.
While investors are generally wary of expansion plans in the current economic climate, analysts like Barclays' Jeffrey Bernstein acknowledge McDonald’s strengths and recent focus on remodeling over new construction.
J.P. Morgan Securities analyst John Ivankoe also positively views McDonald's expansion of a remodeled base and towards top franchisees. CEO Kempczinski reassured investors, emphasizing lessons learned from prioritizing quantity over quality and detailed planning for growth opportunities.
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