Beverages a Bright Spot for McDonald's, But Plenty of Questions Still to Answer

McDonald’s reports Q3 results on November 4. It should peel back what’s been an eventful stretch for the chain staring down an inflection unveiled last month at investor day—one that promises quality-driven investments and billions dedicated to upgrading the chain’s fleet.

Q3 performance expectations

As far as what to expect, Peter Saleh, U.S. Bancorp, BTIG managing director and restaurants and food distributors analyst, recently conducted checks with franchisees to follow up on earlier projections (read more about that here). His conversations confirmed sales trends offered in September by corporate, with results turning positive that month after “modestly negative” July and August runs.

McDonald’s summer performance, operators told Saleh, was dragged by “poor execution” and response to its under-$3 value menu, as well as “lackluster results” from the FIFA World Cup promotion (this 32-year-old sponsorship split publicly a few days ago), an “overly cluttered” marketing calendar, and general economic malaise among lower-income guests.

September, though, benefited from a full month of McDonald’s Red Bull energy lineup—launched in mid-August—easier comparisons, and a later Labor Day. It placed Q3 same-store sales in slightly negative territory, franchisees told Saleh. BTIG estimates about negative 0.5 percent.

Results so far in October appear to have slowed a bit as well yet remain somewhat positive. That owes, Saleh said, to moderation from prior-year comparisons being offset by a similar benefit from McDonald’s Monopoly promotion.

For the remainder of the year, the McRib is expected to return in November followed by another collectible movie tie-in to close 2027 measuring against last year’s viral Grinch socks. That lap won’t be easy (6.8 percent comp), but “many” franchisees noted the themed merch sold out in a few days. “So, a good collectible tie-in with more supply could allow the system to eke out a decent result against this,” Saleh said.

Beverage platform growth

One of the more interesting, recurring themes operators brought up surrounded McDonald’s new beverage platform. Franchisees said it’s a bright spot amid ongoing macro chaos and today accounts for about 2 percent of sales. Additionally, it’s driving 40–50 percent higher average checks (about $16) for customers who purchase one.

They added it’s skewing to a younger, slightly higher-income customer, which aligns with recent efforts to capture the demographic. It’s a group, widely speaking, more insulated from outside pressures. But it hasn’t been contained to this corner, either.

“The interesting part,” Saleh said, “is the beverage platform appears to be resonating even in less affluent, more rural markets market, which franchisees attributed to broad appeal and less competition in said markets from emerging beverage concepts like Dutch Bros and 7 Brew.”

“That said,” he continued, “the comp benefit is being masked by the disappointing promotions and lower-income traffic weakness [noted above].”

McDonald’s abandoned that value platform (10 items for under $3), with management claiming only two-thirds of franchisees implemented the offering as suggested and planned. The operators Saleh spoke with challenged corporate’s statistic. They claimed more than 95 percent of products were priced according to recommendations and any franchisee with “even a single item 10 cents off from the recommendation” was included in that figure.

Broadly, franchisees felt the under-$3 platform didn’t resonate, reach its needed awareness, and those customers who did become familiar with it, didn’t like it, with some additional complaints, Saleh said, about McDonald’s not adequately testing and vetting the platform before launch.

Saleh noted he’s begun to hear that latter line increasingly often (more on that shortly).

He feels Q3 marked a “seismic, yet subtle” change in tone away from deep value messaging industry-wide (also explored in this piece). “We think it’s possible that McDonald’s launches a new value offering in 2027,” Saleh said. “But we don’t expect deep discounts to be the cornerstone of the strategy going forward.”

Menu and technology investments

As McDonald’s unraveled at investor day, the shift is turning toward core equities—chicken, beverage, beef—and bringing a “Gold Standard” to products customers are familiar with. From there, it can innovate around menu architecture versus pulsing deep discounts. It can play into emerging trends, like protein and bigger burgers (Big Arch).

On those notes, and the point around testing, Saleh said conversations produced “mostly negative” thoughts on one of McDonald’s buzzy flips: hand-breaded chicken. It’s currently piloting in “several” U.S. markets.

A few operators indicated hand-breading was the only way to effectively compete with specialty chicken giants like Chick-fil-A and Raising Cane’s many identified as their primary competition. McDonald’s has tried different cuts and seasonings of chicken over the years, but with little traction. This, however, could become a complicated picture.

“Most think the product is a terrible idea and doomed for failure,” Saleh said, “as it could require a six-figure equipment investment [additional fryer, drains, new exhaust hood], a multi-day closure to install such equipment, additional kitchen labor hours, and would also introduce food safety concerns.”

Some operators said no other QSR burger concept offers hand-breaded chicken “for good reasons.” They cited a well-publicized precedent offered by Burger King in 2021–2022, when it rolled a hand-breaded Ch’King Sandwich that lasted about 15 months. It was undone, Saleh said, by its complexity, low sales volumes, “and difficulty of executing at late-night and other shoulder hours.”

While he was aware of the incremental labor piece, Saleh was surprised by the kitchen investment. This level of spend would require a substantial sales lift from the chicken platform, roughly equal to burgers, half of protein sales, to justify, he said. Assuming the average restaurant generates $1.1 million in chicken business (27.5 percent of mix), Saleh estimated McDonald’s would need an 11 percent bump at 30 percent flow-through (factoring in the additional labor) to report a four-year payback on a $150,000 equipment haul.

The next topic, understandably, centered on McDonald’s project NEXT. Franchisees presented mixed feedback, Saleh said, with a skew toward negative. All operators indicated more testing and financial details were needed to gain broader alignment. Several were “adamantly opposed” to the remodel cycle, while others took a more balanced approach and saw the appeal of some elements.

Those not in favor, Saleh explained, felt restaurant economics were under pressure already and had little confidence in the investment cost laid out by McDonald’s, and the limited need for a broad remodel effort given the current condition of the system.

More positive franchisees were encouraged by the equipment and technology details, as well as the fact add-ons could be phased over time. Also, the expected co-investment by McDonald’s.

To refresh, the brand at investor day said “Restaurant > NEXT would feature layouts with dedicated beverage workstations, delivery lockers, assembly areas, more open kitchens and fast-forward drive-thru windows where space allows. The windows could add up to 25 percent more capacity.

McDonald’s said it plans to link those physical changes with ArchIQ, its AI-powered restaurant operating system. The platform combines automation, diagnostics, predictive alerts, and coaching. Its tools include drive-thru voice ordering in English and Spanish, automated inventory tracking, connected equipment, and order-accuracy scales.

McDonald’s told investors its voice assistant, Archy, exceeds 90 percent order accuracy and could save at least 50 labor hours per restaurant each week. Automated inventory could save another five hours and reduce food waste by 15 percent. Accuracy scales already operate in more than 10,000 restaurants, with that count expected to double by 2028.

McDonald’s projected the restaurant program to deliver roughly 250 basis points of gross restaurant-level efficiency in wholly owned markets. That amounts to about $100,000 in annual gross cash flow for an average U.S. restaurant once the changes are fully installed.

The complete package is expected to require roughly $800,000 in incremental investment per traditional U.S. drive-thru restaurant, on top of a standard lobby remodel. Comparable investment in top international operated markets is estimated at $650,000 to $700,000.

McDonald’s promised to provide $8.5 billion in rent relief and capital support through 2036, including roughly $5 billion by 2030. It guided franchisee payback to about four years after its contribution, compared with five to six years for McDonald’s.

Saleh said all franchisees in his checks agreed the total investment cost ($1.2 million to $1.3 million) was “high,” didn’t have enough test cases to inspire confidence, and McDonald’s hadn’t provided enough detail on co-investment with franchisees.

“In fact,” he said, “we heard that the initial prototype restaurant in Sycamore, Illinois, closed for three months for the remodel and cost $1.5 million—well above the high end of the indicated range. Our sense is that the new prototype will need to be tested in several markets and value engineered to reduce cost before franchisees are willing to commit at wide scale.”

Saleh added many operators balked at the rent relief component of the financial support, too, “essentially calling for McDonald’s to allocate more upfront capital investment to make this remodel a reality.”

Franchisees said rent relief discounted over a five-year period at the current inflation and interest rates didn’t make the economics “particularly compelling.” They also questioned why this was a much larger component of the partnership relative to past investment cycles.

Saleh believes the best way to size up the investment in Project NEXT is to compare the capital outlay as a multiple of annual cash to that of McDonald’s Experience of the Future project (2017–2019, when the kiosks entered the picture). BTIG’s analysis suggests this new remodel will cost franchisees about 1.7X annual cash flow as compared to the EOTF investment of 1.2X.

Nearly a decade ago, the program ran $800,000–$850,000, with 55 percent covered by franchisees (or about $450,000). That accounted to 1.2X–$1.3X annual cash flow of $350,000–$375,000.

With Project NEXT, Saleh tallies McDonald’s will contribute about a third of the investment, through capital and rent relief, which leaves the franchisee to invest $800,000–$850,000, or roughly 1.7X cash flow of $500,000 or so.

Rent relief, he continued, is generally granted to franchisees over a five-year term. But it’s accounted for as a contract incentive and amortized over the remaining term of the franchise agreements. Deals are typically 20 years in length, yet across an entire portfolio, the average agreement will have roughly a decade remaining. “So, this spreads the financial impact across a 15- to 20-year timeframe depending on the granting pace,” Saleh said, “producing a more moderate, but longer-lasting earnings impact.’

This chart below evaluated the potential impact. Each year’s rent relief starts a 10-year amortization schedule that peaks in the mid-2030s and ceases in the mid-2040s. In turn, $5.5 billion of rent relief would be $4.65 billion after-tax and just less than $7 of earnings per share hit. Spread over 20 years, the near-term impact would be a tame 10–30 cents and the maximin of under 70 cents not reached until mid-2030.

There was also skepticism on the 250-basis points restaurant margin target elements of NEXT are supposed to be able to generate. Operators said little was shared about specifics and the aim “seems highly theoretical” at this point.

Operators were most excited about the inventory management tools—a smaller portion of the larger pie—but one many agreed touted the opportunity to save manager labor hours, reduce food waste, and enable lower inventory levels.

Some trepidation was voiced on these efforts not being entirely new, as well as the cost of systems (things like technology feeds, RFID tags, etc.), and the need for more accurate accounting that reflects both. In net, a smaller margin benefit.

Arch voice ordering, Saleh said, seems like the largest piece of the margin improvement. It’s expected to save 50 labor hours per week. Sentiment there, he noted, “seems to be reluctant acceptance.”

“While Arch appears to be making progress on accuracy in tests and franchisees are eager for the labor savings [indeed, it’s needed to justify the investment above], some questioned if the consumer actually wants this technology,” Saleh said. “And if voice AI is inconsistent with the renewed focus on service and hospitality.”

Franchisees assigned a “very low probability” to realizing the restaurant margin benefit. They see potential with these efforts, he said, but not enough to generate the purported level of gain.

“The broad takeaway we have is that management hasn’t fully fleshed out the cost and benefits of project NEXT in enough detail, with documented test cases and precedents, to convince franchisees that committing nearly two years of cash flow to this project is worthwhile,” Saleh said.