McDonald’s may never expand CosMc’s. But the spin-off could still pay dividends

The rollout of the new brand comes as drinks are increasingly “Now considered part of that snack zone — more affordable, more indulgent and maybe even a healthier treat,” said Katie Belflower, an editor at restaurant research firm Technomic. “It’s a good profit margin for restaurants. With drinks, you can be a lot creative, without necessarily having the product lines that you would have to invest in with food.”

Since opening the initial location in the Chicago suburb of Bolingbrook, McDonald’s has opened three additional CosMc’s restaurants, all in Texas. For now, the chain plans to open 10 locations by the end of this year for testing, with all but one located in the Lone Star State.

In another sign of the new brand’s expansion, on Tuesday it will launch its own mobile application and loyalty program, called CosMc’s Club. Customers can use the app to place orders that they pick up either inside the restaurant or in the drive-thru. And loyalty program members earn 10 points for every dollar spent; once they accumulate 400 points, they can redeem them for $2 rewards.

While it’s still too early to determine CosMc’s long-term fate, the gamble could pay off for McDonald’s even if the spinoff never makes it past the 10-site testing phase. The app and loyalty program will give the chain even more consumer insights.

“The cost of this, to McDonald’s, is a rounding error. Even if they closed them all in six months, they would still learn some things. Sometimes learnings can be more valuable than you imagine,” Mark Kalinowski, restaurant industry analyst and managing director of Kalinowski Equity Research, told CNBC.

During McDonald’s investor presentation in December, Kempczinski downplayed the short-term effect of CosMc.

“Let me emphasize again that we are talking about 10 stores,” he said at the event. “The big story isn’t about CosMc per se. The big story is what it says about McDonald’s and our potential.”

But for many consumers, CosMc was all the headlines. When the first store opened a few days later in Illinois, eager customers waited hours in lines that hung around the mall for the chance to buy McPops and Churro Frappes.

A few weeks later, the buzz had started to die down. According to Intouch Insight, the average wait time from entering the CosMc drive-thru queue to the speaker arriving to order was 11 minutes and 13 seconds, based on customer visits. mystery shoppers in January and February. But the average service time, after ordering, was just four minutes and one second, just six seconds behind the industry benchmark.

On a Monday afternoon in May, there was no line for this CNBC reporter to reach one of the drive-thru’s four intercoms to place an order.

Investor interest has also cooled as other areas of McDonald’s business attract more attention.

“Six months ago there was a lot of curiosity, but now that you’ve seen McDonald’s same-store sales slow down, that’s where my customers are focused,” Kalinowski said.

In the first quarter, McDonald’s reported 2.5% growth in U.S. same-store sales, a slowdown as price increases fade and customers cut back on spending at restaurants.

From the outside, the CosMc location in Bolingbrook doesn’t look like much. Four drive-thru lines await customers to place their orders. The building’s indigo exterior bears the brand’s name, but no sign of its namesake mascot.

In fact, even though CosMc plays an outsized role in the brand’s fictional origin story on the CosMc website, it is basically invisible from its branding or restaurant.

“He’s not as well-known a figure,” Belflower said. “I think it’s almost to their advantage, because people can understand how CosMc’s is different from McDonald’s itself – but it still has a retro font and colors and things like that, so I think all of that helps to link it to nostalgia.”

The absence of CosMc could also be because the chain’s target customer was likely not yet born when McDonald’s commercials featuring CosMc aired in the 1980s and 1990s.

“Just looking at the menu, it looks like it’s designed for half my age and younger,” said Kalinowski, whose industry experience spans more than two decades.

CosMc customers can choose from a wide range of drinks and a smaller snack menu. Sour Cherry Energy Burst, Island Pick-Me-Up Punch and Popping Pear Slush are among the drinks McDonald’s created specifically for the chain.

Drinks, like a Tropical Spiceade, can be customized with “boosts,” like a shot of vitamin C or a shot of energy, tapioca pearls known as boba, or a choice of eight different syrups. The chain also offers coffee drinks, like its Churro Cold Brew Frappe, the largest size of which contains nearly five times the amount of caffeine found in an average cup of brewed coffee.

CosMc’s is also the latest example of a beverage-focused restaurant that doesn’t just sell coffee. There’s the Utahan’s soda chain, Swig, now majority owned by Larry Miller’s family office. Dutch Bros makes around a quarter of its sales from its Blue Rebel energy drink. And Starbucks’ Refreshers, first introduced a dozen years ago, are the chain’s fastest-growing beverage category in the United States, with spicy new flavors available this spring.

Beverages other than coffee tend to appeal more to consumers looking for an afternoon pick-me-up. Even if they still want caffeine, a flavored drink like a Blueberry Ginger Boost from CosMc’s might be more appealing than another coffee.

CosMc’s level of customization would be difficult at a traditional McDonald’s because it would slow down its drive-thru lanes too much. For example, Starbucks has attributed its sales growth in recent years to a shift to cold drinks and expensive customizations, like cold foam, but customers and baristas complain that complicated orders slow down service too much.

One way to speed up CosMc’s service could be to use its digital menus differently. CosMc’s menu board plays advertisements until a car pulls up next to the nearby intercom, leaving customers little time to think about the menu of more than 70 drinks and food items. The launch of mobile and online ordering will also likely help speed up wait times.

Once customers complete their order, they can pay with the speaker or wait to pay with a cashier at the pickup window. CosMc also asks customers to wait near the intercom where they ordered until their order is ready for pickup. The menu board indicates which pickup window to go to to pick up the order.

Designed as a small-format location, CosMc’s offers no restaurant seating, leaving customers to sit in the 10-space parking lot or continue driving. The Bolingbrook CosMc’s, a former Boston Market location, is much larger than what McDonald’s envisions for the rest of the brand’s locations. But with empty real estate, a 45-minute drive from the company’s Chicago headquarters and a traditional McDonald’s next door, it makes sense that the company chose this location as the first location for its spinoff.

But the history of the place is also a warning for McDonald’s. The company purchased Boston Market after going bankrupt in 2000, intending to use its real estate holdings. But instead, she continued to run the brand.

Seven years later, McDonald’s sold it, following a broader divestment in other secondary brands like Chipotle Mexican Grill. At the time, McDonald’s sales were struggling and executives blamed some of its problems on a lack of focus.