This Value Just Keeps Getting Better

Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Imagine that you walk into a restaurant. The lighting is soft and subtle, there are leather couches nestled in a den. There are tables that look like they’ve been carved from rich wood. You order a beverage and decide to sit on one of the couches while you get online via free wifi. You notice in the corner a flat-screen television. Your family gets to the restaurant and you order everyone's meal and your total bill comes out to $30...wait...what...where are you? You, my friend, are in a remodeled McDonald's (NYSE: MCD). Yes that's right, McDonald's that is known for fast-food and billions of people served, is going upscale. 

The company that started out as a place to get a burger and fries for cheap has seen multiple transformations over the years. McDonald's added breakfast to its menu, and the company found a new avenue for growth. It added the drive-thru window, and that brought another dimension to sales. The company began to expand overseas and that continues to be a growth driver. Now the company wants to shed its fast-food image and get customers to stay a while.

Don't get me wrong, the service will still be fast, but the company isn't necessarily interested in getting you to leave once you have your meal. This is the story that USA Today recently outlined about the company. McDonald's is testing this concept in about 700 restaurants currently. The company is designing its own television channel, called the M Channel, specifically for the new restaurant concept. The M Channel will offer exclusive content using local news personalities and offer promotions, advertising, and entertainment. With localized programming you won't have the same experience in Baltimore as you do in Boston. Advertisers are understandably interested in tapping this captive audience.

That is where I as an investor get really interested. McDonald's isn't just your run of the mill location when it comes to customers. In a mind blowing statistic, the company serves about 27 million people each day in the United States alone. To put that in perspective, almost as many people eat at McDonald's each day as are subscribed to Netflix. If you are an advertising agency, you must look into it as these customers represent a captive audience. If this M Channel is launched correctly, advertisers might be fighting to get space. In fact, McDonald's has the opportunity to severely disrupt the restaurant industry, depending on how the channel is managed.

This isn't to say that other companies can't offer a comfortable dining experience at a reasonable price. However, think about a chain like Starbucks (NASDAQ: SBUX). The company knows very well that if you make customers comfortable and allow them to sit and relax they will spend more. The company in essence pioneered the idea of having fast service, but then letting the customer stay a while to see if they will order more.

A company that could also potentially be thrown for a loop is Panera (NASDAQ: PNRA). This bakery-cafe chain is well-known for strategically placed couches, a relaxed atmosphere, and good food. I'm fully aware that McDonald's doesn't offer the same type of selection that Panera or Starbucks offer. However, what's to stop it from continuing to expand its menu? Years ago the company offered burgers, fries, chicken nuggets, drinks and that was about it. Today there are some customers that go to McDonald's for their oatmeal in the morning and then go back later in the day for a McCafe beverage. Ten or 15 years ago, who would have thought that McDonald's would offer oatmeal and blended coffee drinks? Given that the “typical American eats out five times a week,” it only makes sense that McDonald's wants to capture a larger piece of this pie.

If McDonald's is successful in redesigning its restaurants and engaging customers with the M Channel, it's hard to imagine the company not stealing some sales from its competition. In fact, a comment in the previously mentioned USA Today article says that this is already beginning to happen. The individual quoted in the story said that they loved the fact that they could go to McDonald's and get something for everyone. They used to have to go to three or four different places, but as McDonald's has expanded its menu they can just make one stop. That type of comment should make companies like Panera, Starbucks, and many others lose some sleep.

Starbucks and Panera both are expected to grow earnings by about 19% over the next few years. By contrast, analysts are calling for about 9.2% earnings growth at McDonald's, but I think McDonald's could surprise to the upside. The company is continuing to expand overseas, where it will be years before the market is near saturation. In the international market, the company is testing McCafe stores that are smaller and more directly compete with Starbucks. The company's dessert options are so popular in some countries that McDonald's has dessert-only kiosks.

The bottom line is many people think of McDonald's as just an old stodgy restaurant chain that has probably hit its saturation point. But the truth is that, with concepts like the M Channel, redesigning the restaurants, and McCafe stores, this company constantly finds new ways to grow. As both an investor and as a customer I have to admit “I'm loving it.”


MHenage owns shares of McDonald's. The Motley Fool owns shares of McDonald's, Panera Bread, and Starbucks and has the following options: short JAN 2013 $47.00 puts on Starbucks. Motley Fool newsletter services recommend McDonald's, Panera Bread, and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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