Fresh Beef At McDonald's Could Boost Sales, Brand Reputation, Says Credit Suisse

McDonald’s Corporation (NYSE: MCD)’s switch to fresh beef in its Quarter Pounders, slated to begin by mid-2018, will boost burger sales along with the fast food chain’s reputation, according to Credit Suisse analysts.

The move could also reignite competition between the Golden Arches and Wendys Co (NASDAQ: WEN). The latter chain’s advertising of fresh beef is “its primary point of differentiation,” analysts Jason West and Jordy Winslow said in a Friday note.

Credit Suisse is maintaining an Outperform on McDonald’s with a $137 price target.

“We note this initiative also opens the door to further expansion in [McDonald’s] use of fresh ingredients, which could lead to sales lifts in other products and further improvement in brand perception,” West and Winslow said.

Moo-ving Fresh Beef To The Menu

McDonald’s started testing fresh beef in Quarter Pounders in the Dallas market about a year-and-a-half ago; the Quarter Pounder accounts for about 1.5–2 percent of the chain’s sales, according to Credit Suisse.

In markets where McDonald’s has tested Quarter Pounders made with fresh beef, sales have risen 35 percent in some cases, according to Credit Suisse.

The firm is projecting a 25 percent bump in Quarter Pounders beginning in the second half of 2018.

Frozen beef patties may be prepared ahead of time and placed in a holding cabinet for as long as 15 minutes, the firm said. Fresh patties are cooked to order and “should not sit for longer than 5 minutes.”

West and Winslow offered a suggestion in Friday’s note for how McDonald’s could circumvent the challenge of cooking beef to order for drive-thru customers: A switch from two-platen to three-platen grills, to add capacity.

The larger grills cost between $17,0000 and $18,000 each, according to Credit Suisse.

In order to maintain its dollar amount profit on Quarter Pounders, McDonald’s will need to raise prices by 1.3 percent to account for the higher price of fresh beef, the analysts said — and by 4.2 percent to maintain its gross margin.

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