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OM in the News: McDonald’s Un-Location Decision

April 11, 2021

Fewer people want to eat their meals at Walmart, writes The Wall Street Journal (April 10-11, 2021).  For years Walmart and large restaurant chains like McDonald’s enjoyed a mutually beneficial relationship. The retailer delivered a steady stream of diners, and the eateries provided rental profits and a reason for shoppers to stick around stores. Walmart and McDonald’s first started working together around 1994. At one time, Walmart allowed McDonald’s to be the exclusive restaurant when it was present in a store. 

But those bonds have frayed as more shopping goes online and fast-food restaurants depend more on drive-through windows for sales, a feature Walmart locations don’t have. The pandemic has made indoor dining unappealing—or prohibited—for many shoppers, accelerating the split.

mcdonald's

So McDonald’s is closing hundreds of restaurants located in the huge retailer’s stores, the last vestiges of a 30-year-old experiment between the companies. (At its peak, there were 1,000 McDonald’s restaurants inside Walmarts). The closures could pose a challenge for Walmart, which has long counted on revenue from restaurants leasing space inside its stores. That is different from some competitors such as Costco, which runs its own restaurant space selling inexpensive pizza and hotdogs. Retailers hope food service inside store walls draws shoppers to linger longer or give workers a place to eat while taking a break.

McDonald’s locations inside Walmart stores are generally less profitable than stand-alone restaurants, in part because they lack a drive-through, the main source of McDonald’s sales. And customers at times loaded up on refills and condiments, diluting margins. Even before the pandemic, Walmart shoppers increasingly preferred to shop and leave or buy online. Around a third of restaurant sales inside stores come from Walmart employees.

To compensate, Walmart plans to open more Domino’s, Taco Bell, Ben’s Soft Pretzels, and Ghost Kitchens Brands locations to fill the space.

Classroom discussion questions:

  1. Why is McDonald’s un-locating?
  2. Are there any downsides to replacing McDonald’s with chains like Domino’s or Pizza Hut?

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