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McDonald's pushes for more 24-hour locations

McDonald's Corp. is hoping to boost sales at its U.S. restaurants even further by encouraging more franchisees to stay open all the time.
/ Source: Reuters

McDonald's Corp. wants to boost sales at its thriving U.S. business even further by encouraging more franchisees to stay open 24 hours, but some operators say the push for longer hours comes at the expense of their profitability.

Two years ago, the world's No. 1 fast-food company put the breaks on its rapid restaurant growth to focus on improving service and menu options in the face of sluggish U.S. sales.

Since then, sales in the company's largest market have soared, and McDonald's is now faced with the task of keeping its sales momentum moving.

But that is unlikely to mean many more new restaurant locations. Instead, according to one executive, the company is sticking to its strategy of boosting sales at existing stores with new menu items, updated, "cool" decor, gift card sales, and a push for more 24-hour locations.

"McDonald's wants to be better, not just bigger... expanding our hours in the evening is exactly how we can do that," said Kevin Cook, senior vice president of U.S. restaurant systems. "We continue to grow on a moderate and reasonable pace and there is no change in direction at this time."

About 20 percent of McDonald's 13,700 U.S. restaurants are open 24 hours, and Cook said he expects that number to grow steadily over the next several years. He declined to comment on a recent report by CIBC analyst John Glass, who said McDonald's has a target of doubling the number of 24-hour stores and predicted such a move could add 2 percent to the chain's monthly same-store sales.

The chain is pushing hard for more 24-hour locations ahead of the busy summer vacation season.

The company is offering franchisees who agree to run their restaurants 24 hours rebates on rent between the hours of midnight and 5:00 a.m. for six months, according to Dick Adams, a consultant who works mainly with McDonald's franchisees.

The catch, however, is that franchisees must sign on to the 24-hour plan for at least a year to receive the rebate, something many feel skittish about.

"A lot of the guys that went 24 hours last summer pulled out," Adams said. "In the middle of the winter in the middle of the night there is nobody out."

Cook would not comment on the rent incentives, saying "the biggest long-term incentive is the new business they get."

He added that the opportunity for operators to boost business is proven by the fact that the number of 24-hour stores continues to grow.

Experts estimate that a typical McDonald's restaurant can pick up an extra $300 to $500 in sales per day by operating overnight, representing a roughly 10 percent increase in daily sales. Cook would not confirm those estimates.

That revenue boost, however, is mitigated by higher insurance costs for operating during the more dangerous overnight hours as well as expenses for running the restaurants' equipment all night.

"It looks like real money to the shareholders but to the franchisee it's not a very profitable venture," Adams said.

Morningstar Inc. analyst Carl Sibilski agreed, saying franchisees will likely have to wait between six and nine months for consumers to catch on to the later hours.

"When you switch over to different store hours, initially the consumers don't relate to it," Sibilski said.

"I would be very surprised if it paid off initially," Sibilski said. He added, however, that rivals Wendy's International Inc. and Yum Brands Inc. unit Taco Bell had had success with sales during late-night hours.