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Can Delivery and Mobile Ordering Save McDonald's?

McDonald's (NYSE: MCD) has started the year strong after announcing better-than-expected second-quarter 2017 results, driven by inexpensive cold beverages and pricier Signature Crafted sandwiches.

These efforts and the continued success of the chain's All-Day Breakfast sent comparable store sales 3.9% higher in Q2, more than double the 1.7% increase in the first quarter of 2017. In addition, second quarter diluted earnings per share (EPS) were also strong, climbing by 36% year-over-year to $1.70. 

Cheap drinks, off-hour breakfast, and slightly better burgers will only get the company so far and CEO Stephen J. Easterbrook understands that. Improving the quality of its food will be relevant for growth, but the chain's top executive understands that the restaurant business has become about much more than what's on the menu.

Because of that Easterbrook and his team have been working on transforming their company through technology. This includes increasing the availability of both mobile order and pay, as well as delivery at many more restaurants in the chain.

McDonald's has been working to make getting its food to customers more easily. Image source: McDonald's.

Digital can drive growth

Easterbrook sees digital platforms, specifically the McDonald's mobile app, as a way to make ordering a more convenient, personal experience for customers. He laid out how mobile order and pay figures into the company's plans going forward during its Q2 earnings call.

"We are on track to make mobile order and pay available in 20,000 restaurants worldwide by the end of 2017, including our 14,000 restaurants in the U.S.," he said. The CEO also noted that while it's still early in the rollout process, the company is seeing "higher average checks and the curbside pickup is a convenience that customers value and, thus, enabling us to grow capacity at peak times."

McDonald's has over 36,000 locations around the world. Nearly all of its restaurants are operated by franchisees.

Drive to deliver

It seems that nearly every struggling restaurant chain views delivery as a way to boost sales. McDonald's is no different, and early results show it may actually work.

"Delivery illustrates our ambition to redefine convenience for our customers," Easterbrook said. "In the U.S., during the month of January, we piloted delivery with a couple dozen restaurants in Miami. The initial tests went well and we've moved quickly to expand."

The chain now offers delivery at nearly 8,000 restaurants around the world with many more to follow. Easterbrook sees this expansion as a massive opportunity given that 75% of the population in the company's top markets live within three miles of a McDonald's.

"In many of our markets around the world, we're seeing average check sizes between 1.5 and 2 times higher than our overall restaurant averages," he said. "And in most of our markets, we're utilizing our location advantage and operational efficiencies on customers' orders, getting food from order to doorstep in an average of less than 30 minutes."

Delivery can also help the company expand its business during non-peak hours. About 60% of delivery orders get placed in the evening or late at night, according to the CEO, which should help the chain grow same-store sales by wringing more dollars out of periods outside the lunch rush.

Slow and steady

McDonald's has taken a very measured approach to improving its technology and adding delivery. It tests extensively and then rolls out initiatives relatively slowly. That can be frustrating for shareholders who would like to see the company innovate at a faster pace, but it removes a lot of risks.

Mobile order and pay, and delivery will hopefully work as well on a national and global level as they have in the test markets. These two major additions don't necessarily solve the issues some consumers have with McDonald's food, but they do provide a stronger platform to sell the menu.

In many ways, this is the Golden Arches following a model that has worked stunningly well for Domino's. The pizza chain offers a mediocre product but makes it very convenient for consumers to get it. That strategy has delivered 25 consecutive quarters of domestic same-store sales growth for the Noid-battling company, along with 94 straight quarters of same-store sales growth internationally.

That may not be a formula that wins a lot of critical approval, but it's one that works. McDonald's should be able to follow that model and expand sales by making it really convenient for the public to get its food.

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Daniel Kline has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.