MCD
#Thank you, Steve
I appreciate the opportunity to join the call today and update everyone on the state of our U.S
business
continues to demonstrate solid growth, and I'm proud of our system and the progress we're making
As I look ahead to 2018, I'm excited about our pipeline of ideas and the growth potential they offer
For us, the key will be to execute at a really high level across a number of initiatives and we're investing a lot of time and effort right now to get that right
Let me provide more insight into our Q3 performance and then I'll talk about how we're preparing for 2018. During Q3, we grew comp sales 4.1%, resulting in a comp sales gap of 440 basis points versus the QSR sandwich competitors
Importantly, our comp sales growth was supported by positive guest count growth
This is our third consecutive quarter of positive comp sales growth and second consecutive quarter of positive comp guest count growth
For the past three quarters, we have posted a favorable comp gap versus QSR
We're particularly pleased with this performance because we had to overcome the headwinds of a sluggish overall IEO market that currently offers limited traffic growth
Our success can be attributed to several factors
First, we offered compelling consistent value programs across a number of tactics that clearly resonated with our customers
We continued our $1 any size soft drinks program and supplemented it with the return of McPick 2 for $5 that offered some exciting food deals
We're also starting to get real traction with the targeted mobile offers via our app that are tailored to customers' unique buying preferences
Second, we've been able to capitalize on this increased traffic into our restaurants with menu news that drove customers to trade up to premium higher-margin products
In Q2, we launched our Signature Crafted sandwich line available either in beef or chicken, with three flavor combinations, pico guacamole, sweet barbecue bacon and maple bacon Dijon
In August, we rotated in a new Sriracha flavor that gave the sandwich Crafted line an extra kick
In September, we also reintroduced McCafé to the U.S
This meant a new, more modern look for the McCafé brand and new choices, including the reintroduction of our McCafé Espresso line after a significant equipment upgrade across our system
The McCafé Espresso products perform very well, reaffirming our systems confidence that McCafé can be a significant growth platform for us in the future
As we've seen with both Signature Crafted and McCafé, when we improve the taste and quality of our products to meet customers' rising expectations, they reward us with more business
Finally, we're seeing encouraging customer response to our velocity accelerators including delivery, digital and Experience of the Future
Through our partnership with UberEATS, we now offer delivery in 3,700 restaurants and we're on track to reach 5,000 restaurants by year-end
We're learning a lot about delivery and seeing particular success in dense urban metros with high penetration of younger customers, like New York, Boston, Miami and Los Angeles
I truly believe we're just beginning to scratch the surface on this opportunity
We're also continuing to roll out mobile order and pay with a new curbside check-in option
I'm really excited about the potential of curbside to evaluate the convenience of McDonald's to a whole new level for our customers
We now have mobile order and pay in over 6,000 restaurants
And we expect to reach all 14,000 restaurants by the end of the year
And last, we're making good progress with our Experience of the Future projects and we're seeing comp sales lifts consistent with our targets
We currently have Experience of the Future deployed in 13% of restaurants and that number will increase significantly over the next couple of years
As the pace of activity in the U.S
accelerates, it's critical that our restaurants are properly staffed and trained to execute at a high level
Our McOpCo and operator organizations are investing in labor right now to train for initiatives like hot off the grill, hospitality, curbside, delivery
This will have a temporary impact on margins for the next six to 12 months as we work through our deployment calendar
We've seen this before in other markets like Canada, Australia and the UK when they've launched similarly aggressive plans and we feel quite confident about our ability to manage through this short-term situation
At the same time, we're also ramping up our internal project management capabilities to prepare, deploy and maximize each initiative
We've created dedicated Project Management Offices at both the national and regional levels to ensure we anticipate resource bottlenecks and flex organizational capacity as needed
We aim to prove that size and speed do not need to be antithetical to one another
Two years ago, Steve declared that McDonald's needed to run better restaurants and nowhere was that more evident than in the U.S
market
As Steve mentioned, we recently visited a number of U.S
cities, including East St
Louis, Cleveland, Detroit, Salt Lake, Houston and it was really a proud moment for our owner operators to showcase their progress
On almost every dimension, the U.S
is running better restaurants and that's showing up in the business results
At the same time, that pride and confidence in our performance is helping to energize the system to pursue an even more aggressive growth agenda
Almost 100% of U.S
operators have now signed commitment letters in support of a holistic multi-year growth strategy that will update the entire system to EOTF, make important equipment upgrades to deliver better food and ensure we remain competitive on value
We're excited about what's to come in the U.S
, and I look forward to updating you periodically on our progress
Now, back to you, <UNK>
Question-and-Answer Session
Yeah, hi, <UNK>
So certainly, what you're seeing in the trading results that we just posted, you're seeing primarily labor related to the training that I was talking about
There is some commodity inflation, but the biggest drag that we're facing right now is related to the labor investments that are being made
In terms of going forward, I think one of the pieces that remains to be seen for us is just what does the long-term labor inflation look like in the U.S
And so, we have seen with roughly 5% unemployment that labor inflation has been ticking up nationally
In addition, there's local legislation that's going on as well, where minimum wage laws are increasing
So that long-term could be a headwind, which just would require a faster growth rate than what we've historically seen
But I think right now, it's unclear where that goes
I think for us, certainly the investments that we're make right now on training, those are one-time investments that would abate in the next six to 12 months
And I think the longer term, is we just need to keep our eye on labor inflation across the U.S
Sure
Well, one of the things that we have said to our franchisees in the U.S
is we don't have to win on value, but we can't lose on value
And that means we have to be competitive with our investments against a value program
And I think also it's no surprise that over the last, call it, three or four years since we rolled off Dollar Menu, we weren't as competitive as we needed to be on value
And so what you're going to see from us next year is us being really fully competitive with our near-in competitors with a value program there
It's been written about and I don't think it's any surprise that certainly our value program is going to be focused on $1, $2 and $3 price points for an everyday-value piece of it
And then there will also be deals that will pulse in and out throughout the year as a result of that
When you talk about the investment that is being asked of Owner/Operators, one of the things that we talked about is that this plan has to be looked at holistically
And so while there is an investment that's being made on the value side, there are also some significant efficiencies that are being captured on the other side, around particularly marketing and efficiencies that we're getting there, efficiencies that we're getting at the restaurant level
And so when you look at all of it on a blended basis, we think that this is a balanced plan
And I think, most importantly, the fact that our Owner/Operators were at almost 100% signing up for is probably the best testament that they felt comfortable with the value investments being offset by some of the other things in the P&L
Well, I think we're excited about coffee, in part, because it's a huge category
It's a $30 billion business in the U.S
and it's growing mid-to-high-single digits as a category
So we're excited about the category
It's high margin and we're under-penetrated there
So as we built the plan, it was rally about us getting after an opportunity where we think our McCafé brand has a lot of relevance
We're not going get into the specifics of by product line item, how did those compare versus the average comp, but I would just say that, certainly, we saw the benefit in Q3 of really nice growth on our McCafé business
And as we look out over the next few years, we're expecting to use McCafé as really a platform for us to get additional growth
So we're excited about that
We think we have a good opportunity to get after it
It's really been a question of focus for us
We haven't consistently focused on this in the past
And going forward, it's going be a key area for us
Yes, well, so I'd say what we typically see is as we're deploying, whether it's EOTF, some of the menu news, et cetera, we typically do see a slight uptick in service times, call it, on the order of five seconds or so
And then, certainly as the crew in restaurants get more experience in whatever the initiative is, we expect to claw most, if not all, of that back over time
I think it's, for us, when you look at the Experience of the Future, one of the things that makes it difficult to really do the from-to on that is because as we bring in Experience of the Future with curbside, you start introducing all sorts of new ways for the customer to interact with the brand
And so maybe in the past, they would just go through the drive-thru because, frankly, they didn't see going into the restaurant as a great experience
Now, they want to go into the restaurants because it's an updated modernized experience where you can get table service there
And so it's really, I think, what we're seeing with Experience of the Future is that customers are choosing new ways to interact with the brand that makes it difficult for us to compare
I think the more relevant metric really, for us, is we look at customer satisfaction
We look at customer satisfaction prior to EOTF and after EOTF
And what we're seeing there are significant improvements on the order of three to five points improvements in overall customer satisfaction
So for us, that gives us reassurance that they are enjoying the initiatives that we're deploying with EOTF and they're having a better experience
Yes
I think, as you know, with McPick, certainly this year, there was a heavy local element to it
So we had different regions pursuing different McPick strategies, both the price points that they would hit, but, frankly, also the items that they would be selling for
And so it's difficult to do the comparison that you're talking about because it's not just what item at what price point, but it's also where was the starting price point for that
In general, I think the point that you're making, though, is an accurate one, which is we think that we still had an opportunity to get more competitive on value
Again, we're not trying to win on value, but we can't lose on value
And so I think what you're going be seeing from us going forward is really for us consistently to stay competitive on value
And I think the other thing, as I mentioned earlier in the call, is more of that investment now going forward is going be done and driven at the national level than at the local level, which I think plays to our strength from a marketing communications standpoint where we can really drive that message
Well, so one, I think being relatively new to McDonald's, I'd say one of the things that has really been a highlight for me is getting to know our U.S
Owner/Operators
And I'd tell you they're – it's a very impressive group in terms of what they're able to drive
And so you're seeing that in the results here
Our point of view, and certainly all my discussions with the Owner/Operators in the U.S
has been I would love for every single one of them who's currently in the system today to remain in the system
And so there is no, from our vantage point, concerted effort to try to change the franchisee base or have it look different
But that said, we do have expectations around performance
And, as you said, as we said earlier, running better restaurants is the foundation
And we were not consistently running the type of restaurants in the U.S
that we were expecting to
And so step one has been we have really level set what the standard is for performance in the U.S
At the same time, we've outlined a pretty, what we think is exciting and ambitious growth plan, but it is one that's going to require investment
And so as you put those two together, as you put together a performance expectation along with an investment expectation, we are seeing some Owner/Operators are deciding now is a good time to exit the system
And I think for us, while we certainly are sorry to see folks go, we would rather have that conversation where we're all operating from just a very transparent set of expectations
So I think over the next couple of years, we're probably going to continue to see some evolution of this, but by and large I think the U.S
franchise system as you see it today is going be the same one that we're going to be talking about in a few years
And I think just to maybe give a concrete example, I mean, as we laid out 2018, we have a number of initiatives that are going to be hitting the market in 2018. One of the biggest ones, the first one that's going to be coming out is, we call it, hot off the grill
It's sometimes referred to as fresh beef
But right now, we're actually bringing on a number of regions onto this platform as we convert over our supply chain
When we bring on hot off the grill or fresh beef into a market, we actually have a six week training curriculum that the entire restaurant goes through
And it's a very intensive training curriculum that they have to go to, actually starting with the operator
The operator first goes through training, and then we literally take every single one of those crew members with both an offsite and then an in-store training experience
All the time that's spent on training for hot off the grill implementation, all of that counts against your labor and none of it is revenue-producing
But it's the sort of thing that we think is required to really make sure that when we do rollout hot off the grill that we execute it at a really high standard
So that's just one example, but we have a number of other initiatives that have the similar type of training and preparation curriculum that's going with it that obviously puts a short-term burden on what needs to be done at the restaurant
Yes
And so, I think just to build on that, it is a relatively flat market, but I think what we're seeing is that when you're really sharp with your proposition that you're offering the customer, the food that you're offering, the value that you're doing with the experience, when you've really got a compelling proposition to put forth, you can gain significant share
And so, certainly, the comp gap that we've been seeing, our comp gap has been widening over the last three quarters
And I'm very excited about what we've got in the pipeline going forward
I think as I said at the opening of my comments, the absolute key for us is going to be to execute
But I think if we execute and, again, we stay really sharp with the proposition that we're offering customers, I don't see any reason why we couldn't sustain that performance, but it's on us to demonstrate it
Well, so I'd say we are still in the early innings, in honor of the World Series, in the early innings of digital, but we're seeing, I think, a really nice start to it
So we've had almost 30 million downloads
I would say we're roughly 9 million active users, meaning who are in it on a monthly basis that we're seeing there
And we're seeing strong offer momentum, which is really currently the primary benefit that we're delivering through the app
As we're rolling out now mobile order and pay, the power is going be that to then bring together the offer with the ability to do mobile order and pay
Right now, what we're doing mostly in our restaurants with the roll out of mobile order and pay is we're really at this point focused on getting the operations right
So getting, for example, the crew to understand when a curbside order comes up, how do they take that order, how do they go out and bring the food to the customer
So, right now, I'd say we're spending a lot of time on mobile order and pay
Yes, as we're deploying it, but really make sure we've got the operational muscle there, because what will happen then in 2018 is we're going to flip the marketing switch on it and start to drive really much more increased usage
But, certainly, we've learned from some of the other activity out there
We want to make sure that we're ready when we do flip on the marketing switch that we're ready to handle the business with it, but still early innings
We do think that it's a significant opportunity for us and we would expect in the future it becomes a more significant part of the comp
