What’s NEXT for McDonald’s franchisees
About $800,000 per restaurant in upgrades, with the company promising to cover part of the bill.
McDonald’s is making a plan that would require its U.S. franchisees to spend approximately $800,000 per restaurant on upgrades in order to win back customers, and McDonald’s is promising to cover part of the cost.
At its Sept. 23 investor day, the company announced McDonald’s Next, a strategy focused on menu, consumer, restaurant and people. The most expensive part is Restaurant NEXT, which requires new kitchen equipment, redesigned stores and ArchIQ, an AI system for running restaurants.
As McDonald’s franchise agreements require, franchisees must pay to remodel their restaurants on a regular 10-year cycle.
“A standard required lobby remodel of an average drive-thru restaurant in the U.S. costs about $400,000 to $450,000,” Chief Financial Officer Ian Borden said at the investor day. “To deploy all Restaurant NEXT elements for a traditional drive-thru restaurant, we estimate an incremental investment of approximately $800,000 per U.S. restaurant.”
McDonald’s hasn’t said franchisees must adopt NEXT. Franchisees can pay for the upgrades gradually, adding new features as they start showing their effects, according to Borden.
However, the new kitchen and lobby designs will come with the remodels franchisees are already required to do on the regular 10-year cycle, so many franchisees won’t have a choice.
McDonald’s plans to cover part of the cost with about $8.5 billion in rent relief and capital support through 2036, including about $5 billion by 2030.
Some franchisees were surprised by the cost and worried about taking on more debt while traffic is falling, Bloomberg reported Oct. 6.
Independent franchisees own about 95% of McDonald’s more than 46,000 restaurants, and the company earns most of its profit from their rent and royalties.
“When franchisees have stronger economics, our system is stronger,” Borden said.
McDonald’s U.S. comparable sales rose just 0.8% in the second quarter, and customer traffic fell.
“We expect industry traffic growth in our wholly owned markets will be flat while inflation remains elevated,” said Chief Executive Chris Kempczinski. “For McDonald’s to succeed in that environment, growth must come from capturing greater share.”
Wall Street isn’t convinced yet. McDonald’s stock fell 4.8% the day NEXT was announced. Its stock extended a losing streak to eight straight weeks before rebounding slightly last week, closing at $235.23 on Friday. The stock is down 23% this year.
McDonald’s is expected to report results in late October or early November.
“We expect September will be positive, but because of that slower start to the beginning of the quarter,” Borden said. “We expect the U.S. business will be slightly negative for Q3.”
