Why are McDonald’s restaurants leaving Walmart stores?

Discussion
Photo: Getty Images/Colin Temple
Apr 12, 2021
Tom Ryan

McDonald’s plans to shrink its presence inside Walmart to about 150 U.S. locations from about 500 at the start of 2000 in moves accelerated by the pandemic.

The closures were first reported by The Wall Street Journal, although McDonald’s signaled to investors in July that shops inside lower-volume Walmart’s were closing. At the peak of their 30-year partnership, McDonald’s had about 1,000 locations inside Walmart.

Even before the pandemic, McDonald’s Walmart locations were generally less profitable than its standalone restaurants because drive-throughs have become a primary revenue driver. Sweetgreen, Shake Shack and Chipotle are among chains adding drive-thru lanes for convenience and contactless pick-up.

With the pandemic, sit-down eating became prohibited or risky. Walk-by traffic in Walmarts has also been impacted by the increasing desire of shoppers to buy online and have a get-in, get-out experience or take advantage of curbside pickup.

Subway franchisees have also shuttered their locations inside Walmart in recent years. In February 2020, Dunkin’ decided to exit 450 locations inside Speedway in part because it couldn’t offer its full menu, according to Restaurant Business.

Walmart is testing a variety of other options to replace the closed McDonald’s.

“These spaces have been freeing up over time. We have been and continue to fill them,” Walmart spokesperson Molly Blakeman told USA Today. “We’re looking to both restaurants and services that are really relevant to our customers.”

Walmart is exploring restaurants that don’t rely solely on store traffic and solutions that focus on meals-to-go and delivery. Some former McDonald’s locations will become ghost kitchens, a central kitchen that cooks for multiple restaurants. Taco Bell, Domino’s and Charleys Philly Steaks have filled some spots. Some are being converted to services ranging from tool rentals to hair braiding.

Among competitors, Target’s food service areas are operated under licenses with Starbucks and others. Costco operates its own food court and looks to keep prices low and quality high to drive club traffic.

Costco last week received wide coverage in confirming that seating and a full menu would soon be returning to locations. Costco’s CFO Richard Galanti told CNN, “The food courts work. They’re one of the things we’re known for.”

DISCUSSION QUESTIONS: Why do you think McDonald’s is no longer a strong fit inside most Walmart locations? What should Walmart do with space that is opening up?

Please practice The RetailWire Golden Rule when submitting your comments.
Braintrust
"The rise of home delivery and curbside pick-up is resulting in less traffic inside the stores. "
"Long before the pandemic, McDonald’s learned that its customers were switching to a drive-thru purchase pattern..."
"I expect Walmart will use the space to introduce more non-food services in their stores, such as healthcare. There really is no downside for Walmart in this."

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18 Comments on "Why are McDonald’s restaurants leaving Walmart stores?"


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Mark Ryski
BrainTrust

The answer is clear: these locations were less profitable (before the pandemic) and they relied too much on store traffic, which has been impacted by the pandemic. This is a good example where store-within-a-store doesn’t always deliver the sales outcomes hoped for. Notwithstanding McDonald’s pull back, I suspect there’s a long line of other brands that would be delighted to be located in Walmart stores. I suspect something in the quick serve food category will still most likely be filling these vacant spaces.

Richard Hernandez
BrainTrust

I agree here. I was in Walmart this weekend walking the store, and saw little to no traffic at the McDonald’s in the store (there were more Walmart employees buying lunch there than regular customers). I know Walmart has tried different options and the ghost kitchen concept is the most intriguing. Regardless of what they do as a total business, there are/will be options to fill the space.

Neil Saunders
BrainTrust

The pandemic saw a lot of consumers switch their grocery habits. Shopping was consolidated, resulting in fewer trips to stores. More people used online. And a lot of shoppers maintained a “get-in-get-out” mentality to reduce exposure. In foodservice, options like drive-thru took off as in-restaurant visits dropped back. All of these trends were disadvantageous to McDonald’s branches in Walmart, and they underpin the decision to reduce outlet numbers.

DeAnn Campbell
BrainTrust

McDonald’s learned during the pandemic that they gain much more operational efficiency and boost profit margins by organizing their kitchen around drive-thru rather than in-room dining. I think if they had their way, most QSRs would prefer to be drive-thru only, so it makes sense to divest themselves of a tiny number of locations that are the exception not the rule.

Gary Sankary
BrainTrust

Any quick service restaurant location that does not have the ability to offer curbside or, as they call it, drive-up service should be considered a liability. The move in the market is to reduce in-store dining and build out capabilities that enable them to handle more drive-up traffic more efficiently. Being constrained to the four walls of a Walmart store doesn’t really fit that modern business model.

What to do with the space?

Real estate at the front of a Walmart store should be premium for the right strategy. I would guess that there might be some service options that would appeal to their customers and drive traffic. A UPS mini-store? That might also help Walmart with shipping and fulfillment. Heat-at-home meals, something their customers could pick up on their way home after checking out? Lots of options I suspect.

Derek Lee
Guest

What is the primary objective for this upfront space at Walmart, from Walmart’s POV? Is it a footfall generator, a tool to keep customers in the store for longer, or to offer a fuller suite of services to customers? What has been the experience at other stores with a similar model (e.g. in-store Starbucks at Safeways and Targets)?

My suspicion is that QSRs have made sense at Walmart (historically), because they don’t cannibalize sales too badly and serve as a way to keep customers in the store, rather than as a footfall generator. I personally would love the UPS Store concept, but I don’t think it would serve the objectives for Walmart as much as it would for the customer. When I drop off a package at a UPS Store, I want to get out of there ASAP, not linger to look at a new shirt.

It’s hard to beat chicken nuggets as a reward for getting through an hour of shopping as a kid.

Gene Detroyer
BrainTrust

This is simply an acceleration of a trend that started years ago. it reflects a change in shopping habits. It was built on the idea that shoppers took their time in the store which included getting a bite, planned or spontaneous. Now (and pre-pandemic) shoppers seem to be more focused on getting in, buying what they need and getting out. If eating something is not on the to do list it won’t happen the way it used to.

Venky Ramesh
BrainTrust

The rise of home delivery and curbside pick-up is resulting in less traffic inside the stores. If McDonald’s opens a store just outside Walmart rather than inside, it might make more sense in the current environment.

Steve Montgomery
BrainTrust

In the retail and QSR industries it was always about location, location, location. The rationale was simple. Location was a significant determinant for most retailers’ sales. Long before the pandemic, McDonald’s learned that its customers were switching to a drive-thru purchase pattern rather than coming in for a sit-down meal. This combined with the impact of the changes in purchase patterns for Walmart caused by the pandemic doomed their stores inside most Walmarts.

Dick Seesel
BrainTrust

This represents the confluence of two trends: First, the growth of Walmart’s sales outside of its brick-and-mortar stores, whether through e-commerce or curbside pickup. Second, McDonald’s increased reliance on drive-thru (especially wherever in-store dining wasn’t an option in 2020). This development was a long time coming — but like so many other events in the past year, it was jump-started by the pandemic.

Adrian Weidmann
BrainTrust

Two factors for McDonald’s departure come to mind. I suspect Walmart charges McDonald’s plenty for the real estate. So much that it’s simply not worth the price and the headache. The corollary is that over the past year shopper traffic has been way down, so it’s simple math to calculate that rent, revenue share, reduced traffic, and logistics all adds up into movin’ out!

The second factor I suspect is that Walmart wants to control their space and with the expansion and rise of e-commerce and BOPIS/BORIS, I suspect that prime real estate at the front of the store could be used to address these lucrative initiatives. Why not put a UPS “Access Point” where the McDonald’s used to be? Makes perfect sense.

Ricardo Belmar
BrainTrust

This is yet another trend accelerated by the pandemic. As McDonald’s stated, these locations just aren’t profitable enough to be worth keeping open. For most Walmart customers, I suspect there is a nearby McDonald’s with a drive-thru or curbside pickup that is simply more appealing than having to carry the food out of the store to your car. Plus, there are certainly other brands happy to take these spots inside a Walmart. The ghost kitchen idea is also intriguing, especially if Walmart adds these to their mobile app for advanced ordering for delivery or pickup with groceries. I also expect Walmart will use the space to introduce more non-food services in their stores, such as healthcare. There really is no downside for Walmart in this.

Jennifer Bartashus
BrainTrust

This seems like an example of where parting ways is probably a benefit for both companies. With labor costs rising and food inflation kicking in, along with changing customer preferences, strong unit economics for McDonald’s inside Walmart stores become harder to achieve, especially without a drive-thru. McDonald’s may not really see any meaningful loss of customers, since with thousands of locations, odds are they have a restaurant not that far from a Walmart store anyway.

If Walmart chooses to stick with using that space for food, it may lean towards partners that offer something unique that isn’t available elsewhere in close proximity. At the end of the day, Walmart is always looking to maximize space, drive customer appeal and make its leased space more profitable. Should the company keep that space for its own use, services — such as healthcare clinics, supporting its fintech aspirations, or reconfiguring selling space to make more room in the back for a micro-fulfillment center to support e-commerce could be possibilities.

Craig Sundstrom
Guest

The first question was answered within the post, and if it’s really the case of a double whammy of reduced (foot) traffic in both Walmart and Mc Donald’s — and by extension, I would think, any fast food restaurant — perhaps the areas should just be repurposed. I don’t think we’re really talking about a lot of space here, are we?

OTOH perhaps other forces are at work (could this be a result of WM’s efforts to upgrade its image?); we’re really guessing blindly without more information about the specific stores affected.

Kenneth Leung
BrainTrust

I think COVID changed shopping behavior and there is much less “lingering” going on in shopping. If the MCD location wasn’t performing pre COVID, it isn’t going to perform well going forward. My experience with QSR inside stores is that they are traditionally placed for the person who doesn’t want to shop to hang out while their partner is shopping. Or when it is really hot outside, they’re a way for people to cool off before shopping. COVID simply accelerated the closing of low preforming locations.

Ananda Chakravarty
BrainTrust

According to McD’s Chris Kempczinski, it’s all about the 3 D’s — based on a McKinsey article: Delivery, Drive-thru and Digital are key, and each of these are adversely impacted within a store-in-store model, suggesting a culling of the presence in stores like Walmart. Not that it hasn’t been a great ride — the ability to drive value was definitely a successful one, but McD’s focus on building the loyalty and destination for its customers requires self-housing, and concepts like delivery and drive thrus would require immense efforts and deeper relationships.

storewanderer
Guest
22 days 20 hours ago
I think it may be more of a problem with McDonald’s itself and its execution, operational, and pricing issues in parts of the US. But various other concepts are not surviving in these spaces either. However, historically, McDonald’s with cheap food seemed like a good fit for Walmart with high foot traffic, hundreds of employees, and lots of families shopping. In my area at least, where McDonald’s wants over $5 for a Big Mac, over $5 for a chicken sandwich with two slices of pickle, and $3 for a medium fries, they are no longer cheap food. Walmart locations are busier than ever and have more foot traffic than ever. As far as employees go, if more employees are working part time and not full 8 hour shifts, they are less likely to even consume food while at the store and instead eat before or after work away from the store. But the COVID pandemic seems to have been what really pushed most of these locations off the edge. So in my area in the… Read more »
Rachelle King
BrainTrust

Store traffic is the obvious culprit in this dissolving partnership. However, McDonald’s store count inside of Walmart locations has been steadily decreasing over the years, even before the pandemic. This is a combination of factors beyond just store traffic; the novelty of grabbing a burger and fries while shopping has faded over the years, McDonald’s has added more free-standing stores making it more convenient for consumers to dine outside of Walmart and with that, more food choices have cropped up from meal delivery services to local restaurants introducing delivery through apps like Grubhub. This trajectory has been plotted for some time. A thirty-year partnership is remarkable. They have had a good run.

Walmart should consider using the space to provide relevant services for the respective communities they serve. Perhaps more upscale food or, more trendy food truck options, even hair braiding. Either way, they should be open to what localized change might look like and embrace it.

wpDiscuz
Braintrust
"The rise of home delivery and curbside pick-up is resulting in less traffic inside the stores. "
"Long before the pandemic, McDonald’s learned that its customers were switching to a drive-thru purchase pattern..."
"I expect Walmart will use the space to introduce more non-food services in their stores, such as healthcare. There really is no downside for Walmart in this."

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