The stock market is luvin’ McDonalds stock, which has continued its recent relentless rise to all time highs, up 26% YTD, oblivious to the carnage among the broader restaurant and fast-food sector. There is a reason for Wall Street’s euphoria: the same one we discussed in January in “Dear Bernie, Meet the “Big Mac ATM” That Will Replace All Of Your $15 Per Hour Fast Food Workers.”
In a report released this week by Cowen’s Andrew Charles, the analyst calculates the jump in sales as a result of the company’s new Experience of the Future strategy which anticipates that digital ordering kiosks (shown above) will replace cashiers in at least 2,500 restaurants by the end of 2017 and another 3,000 over 2018. Cowen also cited plans for the restaurant chain to roll out mobile ordering across 14,000 U.S. locations by the end of 2017 (we did not show that particular math, but the logic was similarly compelling).
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Here is a snapshot of the math that Cowen, likely in conjunction with management, used to come up with the cost-savings as McDonalds increasingly lays off more and more minimum wage workers and replaces them with “Big Mac ATMs”
MCD is cultivating a digital platform through mobile ordering and Experience of the Future (EOTF), an in-store technological overhaul most conspicuous through kiosk ordering and table delivery. Our analysis suggests efforts should bear fruit in 2018 with a combined 130 bps contribution to U.S. comps. We believe mobile ordering better supplements the drive-thru business where 70%+ of U.S. sales are transacted. In our view, MCD’s differentiation lies in the operational enhancements of mobile ordering that includes curbside pick-up of orders in order to not disrupt the drive-thru.
Below we show Cowen’s full math laying out why the restaurant chain’s client-facing fast food workers are now obsolete:
We are most excited for mobile ordering, Experience of the Future and the launch of fresh beef to help drive U.S. same store sales in 2018. We provide analysis for the latter three, which cumulatively we expect to contribute roughly 150 bps to U.S. same store sales in 2018, respectively. This gives us confidence to raise our 2018 U.S. same store sales forecast from 2% to 3%, in excess of Consensus Metrix’s 2.5%.
Experience of the Future Features Lower ROI Than Mobile Order, But Offers Greater Potential Longer Term
We are constructive on the use of guest facing technology for the restaurant industry. MCD’s longer-term U.S. story revolves around Experience of the Future (EOTF), a holistic operational and technological overhaul to the store base. MCD’s March 2017 investor meeting centered around the initiative with interactive displays. Perhaps the most conspicuous piece of Experience of the Future lies in digital kiosk ordering, which have seen success in International Lead Markets. Additionally, food ordered via the kiosk is delivered to the customer’s table. We believe EOTF better enhances the instore experience, which represents roughly 30% of domestic sales compared to mobile ordering, which allows customers to avoid leaving their cars.
Our ROI math suggests EOTF leads to a 9% cash/cash return in Year 1 in the 55% of domestic stores that do not require a store remodel, and 5% in the 45% of stores that require a remodel, which is a predecessor to implementing EOTF. Our math is premised on total costs of $150,000 for the Experience of the Future enhancement, and $700,000 of all-in costs when including EOTF as well as a store remodel. MCD has offered to pay 55% of the cost for Experience of the Future, in excess of the 40% the company contributed to the store remodel initiative beginning in 2010, for restaurants that commit to the program by the end of 2017.
McDonald’s targets a high-teens return on incrementally invested capital (ROIIC, or McSpeak for evaluating ROI), improving to the mid-20% range beginning in 2019. We believe EOTF’s ROI is captured over time as the sales lift does not dissolve as in the case of a traditional restaurant remodel. Rather, the lift should sustain as we expect consumers to increasingly embrace technological change. This is evidenced across concepts, such as Panera’s experience with 2.0, as well as McDonald’s own experience in Canada, where kiosks saw 12-13% sales mix in Year 1 and 27% in Year 2. We also note kiosk ordering will also likely lead to labor savings over time which should help boost ROIIC, but is unlikely for the foreseeable future.
In 2017, MCD expects to end the year with EOTF offered in 2,500 domestic locations from 500 at 2016-end. MCD targets the majority of domestic locations to feature EOTF by 2020, but has not given intermediary targets. The amount of stores adding EOTF depends on franchise reception to the initiative but we see positive indicators given our checks as well as the company’s disclosure that 90% of franchisees approved of the initiative after taking the same interactive tour that was given at the March 2017 investor day.
We estimate 3,000 locations to add EOTF in 2018, which should lead to a 70 bps contribution to U.S. same store sales assuming an even cadence of restaurants adding the initiative over the course of the year. Further we assume the mix of stores adding EOTF in 2018 reflects the mix of overall stores needed to add EOTF, or 55% of stores that already have a remodel while 45% require a store remodel. McDonald’s has previously announced plans to remodel 650 restaurants in 2017, which we expect will also add EOTF.
Summarizing all of the above: the workers you see in the photo below are now an endangered species.
Just wondering, how much is a living wage for robots?
And is it aid in dollars or electrons?
I don’t use the self checkout in the grocery store and have no intention of eating at macdonalds if this is the wave of their future, most people are hungry for any kind of face to face human interaction, I think mickey dees will find this a losing proposition.
” I think mickey dees will find this a losing proposition.’
but not b4 the current execs retire and cash out–
“I don’t use the self checkout in the grocery store and have no intention of eating at macdonalds if this is the wave of their future…”
Why would you eat at McPhood even if they still have hooman order takers? I wouldn’t eat there if supermodels were employed as order takers. A few years ago their bathrooms were still clean enough to drop a deuce if the need arose but that changed when they allowed the local bums to use their bathrooms as mini apartments.
Considering what most McD’s employees are like they are doing the public a favor getting rid of them. And no, they don’t look like the two white ladies above.
The two white wimmens look like Euro lesbians. Their shirts say Strasbourg so it’s probably a couple of French Les Bos.
They’ve been here in Tampa for at least 6 months,maybe longer.They’ve also made the ordering counter much smaller.
When they first came out McD had employees leading customers to the kiosk and teaching them how to use it.
I refused,I have never used a kiosk and apparently large #s of people feel the same way as mostly I see people using the registers instead of the kiosks.
I’d like to see a breakdown of the average age/income of the typical McD customer.When all these low income workers can’t spend their automated away earnings,will automation still be saving $ for the company?
How about this…
I think this may backfire on McDonalds. Who goes there to buy food anyway? I don’t think people who make a middle class income go there near as much as lower class income do. If the lower class jobs are dying, who is going to eat there?
Just a thought. Maybe they’ll upgrade their food. But then, if they do, will middle income want to order at a kiosk?
I don’t know, it seems like the snake eating it’s own tail.
McDonalds is replacing 2500 humans with digital kiosks _____
Now if they can replace that crap they call food that is weaponized to kill humans with clean,natural ingredients that nourish the body they will have accomplished something. Nobody I know will miss those kneegrows at the counter who say with a scowl on their face, “can ah hep ya”?
The whole McBusiness model of mass produced food, mass produced people, mass produced everything is just a fail on so many levels, I don’t even know where to start. But people seem to be coming back for more. McD’s sales have remarkably gone up recently. Now, this does not mean this is a sustainable situation, but a temporary blip for sure.
The bigger question is, how many more libtard governments are going to pass 15.00 / hr minimum wage laws, and once the underclass that McD’s primarily employed are forced on to public assistance through more robots, how long before the local / state finances start to look like Illinois.
In so far as anyone from customers to employees to ownership having any effective, voluntary (notwithstanding coercive government) say in these matters, I think CHS nails it:
http://www.oftwominds.com/blogjune17/jobs-automation6-17.html?fullweb=1
BTW, the headline under/misstates the effect on the ground as 2,500 locations adding kiosks will likely leave at least 25,000 order-takers (I reckon 10/location) without a job.
CHS gets just about everything right imo. He is a sound voice of reason.
First all of the part time low wage jobs that students or retired people and moms picked up on while the kids were in school or in the evening to have a little extra for goodies or a better vacation became a necessity to survive for many . That financial condition pushed many young people out and many elderly or the now grossly underemployed competing for those jobs . The industrial jobs that supported a family evaporated or the take home wage won’t take you home !
Now the robotic and auto systems will evaporate those jobs too . Anybody wonder why welfare recipients and disability claims are up ? Unless you are lucky enough to have a government job the private sector jobs that truly pay well are to few in number , and the others are filled with employers taking full advantage of people rather than treating them as an asset all the while bitching about turnover because people are smart enough to see the demand for productivity is the only thing that keeps going up as the pressure on the low wage offered increases ! Human nature everybody wants more for less and the well on all fronts is drying up !
The commenters here who suggest that people will never take to self checkouts and kiosks are likely old folks who enjoy talking to the cashiers in the checkout lines. Jeez, those people make me crazy.
I’m in my 60s and the less interaction I can have with the low IQ idiots who man the fast-food counters and cash registers the better.
Bwahahahahaha! It must be the cost of this automated equipment that delayed it’s implementation but I’ve been waiting to see the cooking/assembly of phast phood become automated since 1992. That was the year that the US Military was kicking tens of thousands of people out due to the ending of the Cold War. I know this because my wife was one of those being “incentivized” to get out.
To help with employing all these about to be unemployed people, da goobermint set up a road show type job fair that went from base to base. One of the corporations participating was Taco Hell. At that time in ’93 they had equipment that could technically automate the cooking and assembly of all their menu items and Taco Hell was bragging about this back then. They were still working out the bugs but I guess it took the demand for $15 minimum wage to make it worthwhile. I figured it would be production equipment that replaced the people first but apparently the cash register replacement beat them to the punch.
A note to those who mentioned the idea of McPhood improving the quality of food………with the population increasing at current rates and considering the turd world nature of the people increasing the population……….phast phood is about as good now as it will ever be in your lifetimes so if you’re still hankerin’ fer phast phood, enjoy it while you can cuz it won’t be getting any better.
There will be some resistance to this at first, but it wil fade.
The young love this stuff – tech I mean. And who uses M alk-ins the most? The young.
So, slowly but surely this will work.
No one wants to employ pople. No one. And especially no one wants to employ pople at $15 an hour for a job only worth $8.
You can try, and ultimately fail, to dictate prices, which is what the $15 an hour is. And it will indeed fail.
Pople?
How did you reach the conclusion “job only worth $8”? I am interested in seeing your numbers.
Dems will scream that if corporate profits rise because of automation, corporate taxes must also rise to pay a universal wage to those who have been replaced.
Cause, ya know, McDonald’s is a career choice.
The beauty of Ludwig von Mises’ way of examining economics (among so many others) was that he put utmost value on HUMAN ACTION (the title of one of his greatest books). He recognized (as governments clearly still do not), that human action, human choice, the VALUE that human beings individually place on everything they own or wish to possess, is FAR MORE IMPORTANT in understanding economics than formulas or other “mathematical” ways of looks at economic behavior. Government continues to believe that laws, restrictions, bans, tariffs, taxes, permits, subsidies, incentives, etc. have NO OTHER EFFECT on anyone OTHER than the effect THEY intend.
At $6 an hour an employee is still far more affordable than the capital investment, changeover costs, support costs, etc. of automation to replace him/her. At $15, its a no brainer, and unless the employee can deliver $15 an hour worth of value to the bottom line, he/she will be replaced by automation. So where are teenagers going to get their first work experience? Where is the unskilled laborer going to find the first rung of the ladder of success? Governments simply don’t care, because none of these problems exist as far as they are concerned. Human Action in response to their laws is NEVER part of their consideration.