Commentary

McDonald's Resurgence Gains Momentum As Stock Takes A Hit

By and large, there was lot of happy news in McDonald’s fourth quarter and full year 2017 results released yesterday — including its best comparable sales performance in six years and better-than expected earnings and revenue. But the stock took a 3.7% beating nevertheless on fears that its revival of customer-pleasing cheap eats will cannibalize sales of pricier menu items, as well the impact of rising labor costs.

“2017 was a strong year for McDonald's as customers responded to the many ways we are making their experience more convenient and enjoyable,” McDonald's president and CEO Steve Easterbrook says in a release revealing that global comparable sales increased 5.3% on the year and U.S. sales were up 4.5% at established locations during the fourth quarter.

“McDonald’s has been winning market share back through different initiatives in the last few years, from new iterations of its classic burgers to food delivery to a mobile app as well as to discounted drinks and offerings like the McPick 2 deal and the new Buttermilk Crispy Tenders. That has led shares to all-time highs of late. And the chain expects the rollout in the middle of the year of its fresh beef Quarter Pounder to feed that momentum,” reports Phil Wahba for Fortune.

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But the earning report “served up a tantalizing taste of a trend the Federal Reserve thinks will be super-sizing across the U.S.: a tightening job market translating into a pick-up in inflationary pressures,” observes Luke Kawa for Bloomberg Markets. “Margins shrank by 150 basis points at company-operated U.S. stores, due in part to higher labor costs, the Oak Brook, Ill.-based fast-food behemoth said Tuesday” he continues. “CFO Kevin Ozan attributed the development to ‘both wage pressures and our continued investments in deployment of our key initiatives.’”

Wall Street also “worried that the company's addition of a new $1 $2 $3 Dollar Menu may prompt more customers to trade down to cheaper menu items, and weigh on growth,” CNBC.com's Sarah Whitten points out. And competitors are responding in kind. 

“Value menus have become increasingly important to fast food companies looking to boost sales. Earlier this month, McDonald's revived the name of its once-popular Dollar Menu, but this time items cost $1, $2 or $3. About the same time, fellow burger chain Wendy's expanded its four-for-$4 menu, which includes chicken sandwiches, spicy wraps and bacon cheeseburgers,” writes the AP’s Joseph Pisani in the Chicago Tribune.

“Neil Saunders, a retail analyst at GlobalData Retail, said that the value meals are a ‘necessary evil,’ because while they bring in more customers, the deals lower profits and hurts sales of pricier items. He added that McDonald’s should find a way to increase the number of items it sells, or get people to order more of its pricier items,” Pisani continues.

One way to increase sales is to build more outlets and McDonald’s is doing just that — about 1,000 new stores worldwide to add to the current 37,000 locations. It also will continue to make technological upgrades at selected restaurants, Nathan Bomey and Zlati Meyer write for USA Today

Although McDonald’s “declined to provide a breakdown of where the new restaurants will be located,” one of the more innovative ones will be on the site of a recently closed, long-time tourist attraction in Chicago. The company unveiled plans for a 19,000-square-foot, eco-friendly restaurant with apple trees poking through the roof. It will be build on the site of the former Rock ’n’ Roll McDonald’s franchise on North Clark St. in Chicago.

“This new restaurant is part of McDonald’s ‘Experience of the Future’ campaign, a way the company is redefining its brand by building new restaurants across the globe, according to a spokesperson. The company’s purging itself of dinosaurs, like the Des Plaines, Ill. museum, and an old-school restaurant in Portland, Ore.,” reports  Ashok Selva for Eater Chicago. “The new restaurants will feature both touchscreen kiosks and table service, plus integrate the restaurant’s mobile app in new ways. The company sees this as ways to endear itself to younger customers.”

In a way that rock ’n’ roll once did?

 
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