McDonald's Corporation
(
MCD
) posted a 1.8% decline in same-store sales for October. This
was the first time since 2003 that McDonald's has posted negative
comparable sales, but the news was hardly surprising since the
company had already mentioned during its earnings call that the
October comparable sales were trending negative.
Comparable sales growth is an important measure to gauge a
restaurant's performance since it only includes the restaurants
open for more than a year and excludes the effect of currency
fluctuation. We look at some of the tactical and strategic
changes implemented by the world's biggest fast food chain to
combat slowing comparable sales.
See full analysis for McDonald's Corporation
Not An Easy Environment
While generating top-line growth remains a challenge, the
company surely isn't facing any respite on the expenses
front. The fast food giant expects commodity costs to rise
3.5% to 4.5% in the U.S. and 2.5% to 3.5% in Europe. Labor
costs, at least in the U.S., will be high in 2012 after the
enactment of the 2011 HIRE Act payroll tax credit. With the global
economy in a precarious state and the consumer confidence weak,
implementing price hikes becomes all the more
challenging. Raising the prices could have a detrimental
effect as consumers generally tend to display a high negative
elasticity during tough economic times.
McDonald's, as it has in the past, is relying on a combination
of new product introductions and offering value meals to entice
customers to its restaurants. Extending hours at its
restaurants and offering breakfast options during the
wee hours
of the day to increase the guest traffic also remain a
priority.
So What Next?
The big addition to McDonald's menu has been the Cheddar Bacon
Onion sandwich. The company will also reintroduce its mackerel
sandwich and the McRib shortly. In terms of offering options
for the more price sensitive customers, a greater focus on Dollar
menu will help bring in additional guests. The company had shifted
its focus from Dollar meals to Extra Value meals due to higher
margins associated with the latter. But, given the overall weakness
in consumer confidence levels, the move did not really go down well
with the customers. So, the focus has again shifted to Dollar menu
meals with items such as McDouble being offered for $1 since
mid-September. Restaurants across the country will also continue to
offer soft drinks and premium roast coffee for $1.
Similarly, in Japan, the company has a 100 Yen menu as part of
its value offerings. In Australia too, McDonald's has been
trying to increase its guest count through the Loose Change menu
and the addition of more premium items such as the Serious
Lamb Burger and the Serious Lamb Taster Wrap. In France, Petit
Plaisir, the smaller sandwiches priced at 2 euros, will be extended
nationwide.
But the company has admitted that there is usually a lag of two
to three months between when the actions are implemented and the
corresponding results start getting reflected. Thus, the next
couple of months might still remain weak but a continued weakness
beyond the stipulated time-frame would imply that the restaurant
chain is not dynamic enough to adapt to changing consumer demands
and increasing competition. This could lead to downside to our
current price estimate.
We have a $94.5 price estimate for McDonald's, which is
about 10% higher than the current market price.
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