McDonald’s unveiled the McDonald’s Media Network at its investor day last week, a new division of the company that will sell ads from other brands across its app, self-order kiosks, menu boards, and drive-thru screens. It had been testing the concept since August at 450 company-owned restaurants in the US, which is just about 3% of its roughly 14,000 US locations, most of which are franchise-owned. McDonald’s plans to eventually roll out the ads to more stores, though it hasn’t indicated if or how it would split the revenue with franchise owners or if franchises will even be included.
So far, the ads just show up after you’ve ordered, while waiting for your food. (Uh oh, did McDonald’s just find an incentive to make the wait time longer? Future C-Suite Conversation: “If we slow the drive-thru by an average of 10 seconds, it’s almost undetectable to the customer, but adds thirty million additional ad slots each day!”)
Global CMO Morgan Flatley pitched it as “an opportunity to generate revenue for the system, with little in the way of additional costs, no operational complexity, and no disruption to our customer experience.”
It’s actually a great idea, and the move makes sense for McDonald’s, which has always positioned itself more as a real estate holdings company than a restaurant business. McDonald’s model is to own or control the land under its restaurants and collect rent from franchisees, a structure that offers operating margins in the mid-to-high 40s, which is unheard of for most restaurants.
Real estate and advertising go hand-in-hand. And just like real estate, ad businesses operate with incredibly high margins, especially in scenarios where they already own the slots where the ads sit. It wouldn’t surprise me if McDonald’s turned all of their outdoor signage into digital billboards under the golden arches at some point in the future, given their prime locations in most cities and towns.
The timing is good for the company too, as US traffic fell 4.5% last quarter, sales growth stalled out, and the stock just hit a 52-week low after CEO Chris Kempczinski told CNBC, “We’re not expecting things to change.” (Is that the same guy who couldn’t stand the taste of his own “product” in a viral video?)
CFO Ian Borden told CNBC:
“We have one of the most valuable brands of any company of our size and scale in any industry. We serve about 85% of the U.S. population at least once a year, so we have reach that’s quite unique, and we have 14,000 locations across the U.S., which means we’re in every community, and we’re connecting with every consumer.”
McDonald’s has an opportunity to make one of the most epic moves in history and use its advertising revenue to offset the rising cost of its food business, which has seen menu prices increase by 40% since 2019. They could take that ad revenue and use it to subsidize food prices, bringing the menu down to a level that no other fast food chain on the planet could compete with and win back their customers who would gladly watch some drive-thru and in-store ads in exchange for affordable combo meals.
They absolutely won’t do any of that though. Those ad dollars are going straight to the company’s bottom line, which is why it might be a good time to buy some MCD stock right now, as we’ve all seen what advertising does to a company’s profits. McDonald’s says it aims to build a $1B ad business “over time,” which would only account for about 4% of revenue, but would carry equally high or higher margins.
