When the going gets rough, the marketing gets cranking, McDonald’s new CEO, Don Thomson, told analysts during a conference call yesterday. And things are rough all over. "This is a time for us to focus on guest-count growth and market-share gain. And so we really go at this very hard in times like these, even though it means an investment," according to Thompson.
Headlines and analysts have been telling the story for some time, but now they’re hitting home in Oak Brook, which reported its slowest quarter in 10. “McDonald’s Profit Declines As World Economy Weakens,” reads the New York Times. “Higher food, labor, occupancy and business-investment costs are hurting profitability, reports the Wall Street Journal’s Annie Gasparro. “You are starting to see signs that consumers are spending less at restaurants,” Morningstar analyst R. J. Hottovy tells Reuters’ Lisa Baertlein. “You are also seeing increased competition.”
The thing of it is, global sales for the second quarter at McDonald’s restaurants open at least a year were up 3.7% for the quarter, with gains in every region. But that’s less than Wall Street anticipated and the strong dollar isn’t helping the bottom line, as Bloomberg Businessweek’s Leslie Patton points out. As a result, McDonald’s “disappointing” results were the biggest drag on the Dow yesterday, Reuters’ Chuck Mikolajczak reports, with its share price sliding 3% to $88.87 and the industrial index slipping 1%.
“They went hardcore on the value strategy and likely their margins took a hit,” Telsey Advisory Group analyst Peter Saleh tells Patton. Promotions for items like the seasonal Cherry Berry Chiller smoothie drew in customers this summer, according to Thompson, and Gasparro reports that McDonald's is “hoping to build on that momentum” with an "Under 400 Calories" menu.
“As you can clearly see, we are operating in a more difficult global environment,” Thompson said. "We are experiencing stronger headwinds on both the top and bottom lines. Some of the headwinds are macroeconomic, such as declining consumer sentiment. Other pressures are the result of planned strategic decisions we have made to grow the business."
The debt crisis in Europe has consumers squeezing their euros and dining in more often. In North America, price competition held down margins but same-store sales were up 3.6%. And although the Asia Pacific, Middle East and Africa division posted a same-store increase of 0.9%, “strength in Australia and China was offset by continued weakness in Japan,” writes Gasparro.
Zanzibar, where the Golden Arches don’t yet seem to have a presence, was flat. The company has more than 33,500 locations worldwide; about 20% are company operated.
McDonald’s is gearing up for a huge London Olympics thrust, where it is one of the major corporate sponsors. A campaign touting its items that contain less than 400 calories breaks today. "We want customers to understand that they have food that they love, but food that they can feel good about enjoying regularly," McDonald’s USA CMO Neil Golden tells the Chicago Tribune’s Corilyn Shropshire.
Meanwhile, a picture of the world's largest McDonald's restaurant -- the flagship of four outlets at the summer games –- accompanies the Chicago Sun-Times’ coverage of earnings this morning. It will have a staff of 500. But besides the grand advertising flourishes and its looming presence in the Olympic Park, it’s also going YouTube.
“We're sending more than 130 of the best of our best from across the world to the London 2012 Olympic games,” reads a promotion on its corporate “About” page. “Starting on July 28, follow five stories as our crew discover London and the Olympic spirit in us all.”
An interesting note in Shropshire’s piece on the 400-calories campaign: Bonnie Riggs, a restaurant industry analyst at NPD Group, points out that many fast-food chains are already promoting lighter alternatives but “when consumers eat out, they want to indulge and leave concerns about which foods are low fat, low calorie and low sodium at home.” An NPD Group study finds that only 9% of consumers look for healthy, light options when eating out.
With more than a third of U.S. adults classified as obese, one would think that healthier fare is a growth market, however.
To that end, the new United States Healthful Food Council (USHFC) is unveiling its Responsible Epicurean and Agricultural Leadership (REAL) program today, which it describes as “a voluntary, holistic and consensus-based nutrition rating program designed to increase access to healthful, affordable food and beverage options when dining away from home.” Through its “Eat REAL” campaign, the USHFC will promote certified restaurants and other food service providers that “utilize nutrition and sustainability best practices.”