Market Overview

4 June 2020

McDonald's and Starbucks Join the "Buy Everything" Rally

McDonald's shares broke through a psychologically important $190 level of April and May resistance at Wednesday's trading in New York. The American fast food giant’s shares rose sharply by more than three % to $193.29 per share. The major drivers for the rise were numerous reports of the chaos and hype that accompanied the re-opening of the McDonald's drive-through windows in the United Kingdom.

The fast-food giant began to serve customers again in drive-through restaurants across the UK and Ireland on Tuesday, sparking massive two-hours queues of cars and even police interventions as a lot of people rushed to get their fast-food pack. At one store in Newbridge, on the outskirts of the Scottish capital, staff said that over 120 people had been through just in the first 60 min since the opening, according to a report in the Edinburgh News. Police officers were sent to a McDonald's branch in Redditch in the West Midlands area as traffic jams clogged the streets. Lengthy queues of customers desperate to get their hands on a Maccies quickly grew after KFC competitors drive-through openings previously sparked ballyhoo across the UK, the Birmingham Live News wrote. Hungry drivers will be restricted to a £25 limit per car and a reduced menu, while the company said the service may not be as quick as normal due to smaller teams and social distancing in the kitchen. 

McDonald's is planning to reopen 1019 restaurants for drive-through and delivery in the next three days, after the pandemic forced it to close the doors of UK venues since mid-March. It will also add 75 restaurants to its McDelivery service, either through Uber Eats or Just Eat. “To manage the anticipated demand, we will release the locations of the reopening restaurants on the morning of each day,” the company spokesperson said. Apparently this is also an excellent marketing move as Burger King, which is owned by Restaurant Brands International QSR, and KFC, which is part of Yum Brands, have also been trialling phased reopenings of their restaurants over recent weeks.

McDonald's shares initially rebounded from the bottom of $125 during the overall market collapse on March 18, and then within just one week they soared in price to $170, not even waiting for the start of normal operational activity of the restaurant chain in continental Europe, reacting to the determination of its management to offer the maximum possible service even in the face of a pandemic. Car queues at restaurants became a surprise business card of McDonald's after re-opening in France back in April. Now in June, as already almost everywhere across Europe, all French restaurants are opening their doors. President Emmanuel Macron has already characterised it in his Twitter on Tuesday as an evidence of returning of happy days.

For sure, they are especially happy for the owners of restaurant chains, even though service in McDonald's is only possible at tables where the waiters bring orders. In those countries where service will only be provided through the drive-through lane for a long time, and this is not only the UK, but also for example Russia, India, the business of fast food restaurateurs may well fuzz like hot burgers. McDonald's drive-through windows generates about 70% of its revenue, and even reopening of traditional service restaurants won't probably make such a big difference due to the social-distancing protocols and carefulness of the customers. Ordering at kiosk, handwashing stations for customers, one direction seating halls and tables divided by glass walls is also parts of McDonald's smart strategy for the clients to feel safe. The only question for the personnel is when and how people will start tipping as they pay mostly by card, but that is not the business of the company.

Longbow’s analyst Alton Stump last week raised his target price for McDonald's to $210 from $197 per share. He remarked, things weren't much better in April with same-store sales down by 15%, but over the first three weeks of May they've improved the figure to negative 5%, and he thinks the fast-food giant will rebound more quickly than its rivals. This forecast looks quite realistic, considering how quickly investors in the last couple of weeks bought almost all the shares that they only met on the way. Other chains are starting to realise that drive-through windows will be the new normal and are changing to accommodate to it. Shake Shack, for example, said it would be knocking holes in its walls to allow for drive-through or pickup. What may also be important to the recovery of the industry is that as the rest of the economy sees a revival and there is more flow of money then more revenue will be accumulated from breakfasts, which account for 25% of sales and 40% of profits. Office managers are remarkable contributors to fast food industry revenues. McDonald's and other fast food establishments need their consumers to leave home for work in the morning and get their breakfasts from them so their business performance can be restored.

Some very popular food places or coffee bar networks could also benefit from the situation if they are positioning in the middle between traditional cafes and fast food systems. A striking example of this approach is Starbucks, which of course has always focused on the creation of a comfortable atmosphere where loyal customers can sit for a long time and even work in the cafe. The famous coffee bar chain also delivered favourite varieties of coffee beans in numerous third-party stores, including Internet deliveries. Maybe the customers' devotion to the brand and their ability to get what they want even in conditions of social distancing is the main reason for quite a good performance of Starbucks shares.

The unique survival capacities of Starbucks and its ability to expand the coffee place networks even in the crisis of 2008-2009 was described in detail at the beginning of the year.

And now again, Starbucks wants to keep the team and expects full functionality by September. The management acknowledged that some workers haven't been getting the hours they expected, and noted that they may not get them for a while. In the US, Starbucks initially paid all of its workers through May 3 and in this way gave them the option to stay home but also created an incentive for workers to go in as bonuses were handed out to these workers. The coffee chain began to reopen closed stores at reduced hours and with many conditions on May 4, restricting operations to  drive-through services only in most cases. The company's plans allow Starbucks employees to keep their benefits, store discounts and healthcare premiums.

Much pandemic water has flowed under the bridges since that time but slowly and steadily, things are going back to square one. Now the markets are observing for the second week in a row how Starbucks shares are consolidating at a distance of maximum $3 from the powerful level of two-month resistance of $80 per share, and yesterday the closing price $79.52 came as close as possible to this technical border. It is quite logical - at least – that it should not be excluded that in this case too there may be a break above, which would technically open the way to the area of $84-85 per share, but later Starbucks prices maybe led to its well-known peak levels of July 2019, when the price exceeded $99 per share.


Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.

Lysakov Sergey
Market Focus
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