McDonald's running low on quick fixes for U.S. sales

Tue Jan 22, 2013 2:06pm EST

A McDonald's restaurant's drive-thru sign is pictured in Los Angeles April 4, 2011. REUTERS/Mario Anzuoni

A McDonald's restaurant's drive-thru sign is pictured in Los Angeles April 4, 2011.

Credit: Reuters/Mario Anzuoni

(Reuters) - McDonald's Corp (MCD.N) is running out of quick-fix strategies for stemming declines in U.S. restaurant sales inflicted by tougher competition for customers who are pinching pennies in a weak economic recovery.

The world's largest restaurant chain by revenue welcomed customers on Christmas Day and shifted the limited offering of its cult favorite McRib sandwich into December to avoid a big year-end decline in its U.S. restaurant business. But, it appears the company has exhausted its supply of such tactics.

"There are no Band-Aids for January, February and March," said Richard Adams, a former McDonald's franchisee who now advises the chain's restaurant operators. "There's not too much they can do about it. There's no holiday they can stay open on."

McDonald's posts December sales and fourth-quarter earnings on Wednesday. Analysts on average forecast $1.33 a share, flat from a year earlier, according to Thomson Reuters I/B/E/S.

A bump in the road late last year endangered the company's established dominance over the fast-food industry and turned up the heat on Chief Executive Don Thompson.

Thompson took the helm in July, as rivals such as Wendy's Co (WEN.O) and Burger King Worldwide Inc (BKW.N) were making a comeback by mimicking McDonald's turnaround strategy with expanded menus, renovated restaurants and longer hours.

The CEO already has shaken up the executive suite, replacing the president of U.S. operations a week after the company in October reported a decline in monthly global sales at established restaurants - the first such drop in nine years.

Analysts and investors say McDonald's will keep using its size to its advantage. And, it should have an easier go of things in mid-2013, when the year-earlier impact of balmy winter weather wanes.

Peter Jankovskis, co-chief investment officer at Oakbrook Investments, which owns McDonald's stock, is keeping the faith.

"We have every confidence that McDonald's will rise to the challenge," he said.

Shares in McDonald's were about flat at $92.85 on Tuesday, down more than 9 percent from a year ago. The Dow Jones Industrial Average .DJI., of which McDonald's is a component, is up more than 7 percent over the same period.

SHORT-TERM SOFTNESS?

Unseasonably warm temperatures helped McDonald's dish up big gains in December 2011 sales at established restaurants in the United States, its second-largest market for sales just behind Europe.

That set up a high hurdle for restaurant sales growth in December 2012. And, McDonald's faces similarly large challenges in the first three months of this year.

Fifteen analysts polled by Consensus Metrix expect McDonald's to post a small decline - 0.54 percent - in December 2012 sales at U.S. restaurants open at least 13 months when it reports on Wednesday.

That would be a big reversal from December 2011's 9.8 percent gain.

Calling Christmas Day the company's largest holiday sales opportunity, the chief operations officer for McDonald's USA urged franchisees to break with tradition and open their doors. The company also moved the start of its McRib sandwich promotion from October to December.

If not for those two moves, analysts said, December same-restaurant sales would have seen a much larger drop.

McDonald's also has been doubling down on its low-price Dollar Menu promotions to attract more customers, many of whom have been pinching pennies on meals away from home.

Such "value" menu sales can squeeze profits if customers do not also purchase higher-margin add-ons like drinks and premium items, so investors are keeping an eye on profitability at McDonald's.

The chain's U.S. growth in average check - a gauge of restaurant performance - was flat for 2012 while the overall fast-food industry was up 2.2 percent, ITG Investment Research analyst Steve West said, citing his firm's data.

The company's average check was up less than the industry in the first and second quarters of 2012. It diverged in the third and fourth quarters, falling slightly as the overall industry gained, said West.

McDonald's has a track record for taking items sold by other chains and putting its own spin on them. Its recent McCafe roll out of coffee, smoothies and other drinks was a huge success.

Still, some analysts worry that the company - which is testing its own version of chicken wings - lacks plans for tempting new food to compete with the flurry of new products being introduced by smaller and more nimble rivals.

"Nobody wants the same old thing at McDonald's," West said.

(Reporting By Lisa Baertlein in Los Angeles; Editing by David Gregorio)

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Comments (5)
ErnestPayne wrote:
Could customers who cut back to McDonalds to eat out be feeling “better” economically and be eating out at “better” restaurants?

Jan 22, 2013 5:06pm EST  --  Report as abuse
richray2 wrote:
McDonald’s new cold, hard and weired seating has driven many older generations away, McDonald’s only want to be a drive Thur!

Jan 22, 2013 7:51pm EST  --  Report as abuse
WeAreLosingIt wrote:
“Its recent McCafe roll out of coffee, smoothies and other drinks was a huge success.” Where did the author of the article get that from? McD’s has never broken out sales in that detail. No facts to support “huge success” at all…

Jan 22, 2013 10:42pm EST  --  Report as abuse
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