Lunch Crunch Stymies McDonald’s Growth

Lunch Crunch
Lunch crunch stymies McD’s growth

McDonald’s Corp. has the same problem as Chicago’s notorious Circle Interchange: rush-hour bottlenecks.

Sales volume at the Oak Brook-based chain has peaked in its two most critical hours: the busiest 60 minutes at breakfast and lunch. Much the way highway builders ease congestion with automatic tolls and more pavement, the company is installing a new computer system and extra drive-through lanes to increase capacity. It also wants to expand restaurant crews and to add more expensive sandwiches to boost revenue.

Average yearly sales across McDonald’s 14,000 U.S. restaurants have increased by 54%, or $875,000, to $2.5 million per restaurant since the company started its turnaround nine years ago. But Jim Johannesen, executive vice-president and chief operating officer of McDonald’s USA, told analysts this month: The growth has “been in all day parts, except we haven’t been able to realize that same benefit during the peak lunch hour or the peak breakfast hour.”

The busiest hours vary by market but are typically from 8 to 9 a.m. and from noon to 1 p.m., according to analysts and industry executives. The company said in an internal memo last year that capacity for the lunch rush had been stalled for five years at 75 orders at the drive-up window and 55 at the counter. A McDonald’s spokeswoman declines to comment on what she calls proprietary information.

As with the company’s nationwide remodeling program, which has cost an average of $600,000 per location, franchisees will pay much of the bill for the peak-hour fixes. And, based on results at already-upgraded restaurants, it will take a year or more for them to be paid back in higher sales.

McDonald’s new POS 6.5 computer and sales system will make it easier for the crew to fill orders quickly and accurately even as the burger chain adds more menu items, Mr. Johannesen told analysts. The new system also enables restaurants to use handheld units, now employed in 1,000 locations, to process more orders and take cash outside. The company is testing handhelds at the front counter and mobile ordering from smartphones.

The computer system costs $12,000 to $17,000 for an upgrade on newer systems to $40,000 to $46,000 for a new installation, according to company documents. McDonald’s hasn’t said whether it will subsidize these tech purchases, but franchisees have been footing the bill for more than half of the remodeling costs, which typically include a second drive-through lane.

Though McDonald’s executives haven’t said how much more capacity the technology will yield, reducing drive-through service times by 10 seconds “equals 1% in same-store sales growth,” says Andy Barish, a San Francisco-based restaurant analyst at Jeffries & Co., relaying a statistic McDonald’s has used over the years.

To handle more traffic-two-thirds of U.S. business comes from car orders-McDonald’s also needs to redo more restaurants. To date, 36% of traditional freestanding locations have more than one drive-through lane, and the company aims to add them to 8,600 more over the next several years, according to Milwaukee-based Robert W. Baird & Co.

Sales at remodeled locations after nine months have been about 6.5 percentage points higher than the company’s overall gains, Mr. Johannesen told analysts. Same-store sales in the U.S. were up 4.1% through October this year.

Putting more employees behind the counter and in the kitchen at peak hours would enable McDonald’s to serve more customers, too, company President and Chief Operating Officer Don Thompson told analysts.

And if restaurants still can’t hustle through that many more orders, there’s always another remedy to the rush-hour bind: pricier products. This year, the company has raised prices by 2.4%. It’s also testing several premium items for 2012, including large chicken McWraps, which have sold well in Europe and Australia but haven’t done as well here, and an English pub burger.

“If they’re not selling $9 burgers, it’s not likely that they can get to a higher level of unit volume,” says Darren Tristano, executive vice-president at Chicago-based food retail consultant Technomic Inc.

View the full article on All Business

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