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Mcd
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1
McDonald’s Corporation Analyst Maria Jose Abuawad April 23, 2013
Figure 1 1 Year Performance MCD vs. S&P 500
Ticker MCD
Exchange NYSE
Industry Restaurants
Sector Consumer Staples
Classification Income and Capital
Appreciation
Market Cap. US $99.3 Billion
52 Week Price range $83.31 - $99.78
Recent Price $99.05
Current P/E 18.48
Projected 2015 P/E 17.5x
Projected 2015 EPS $7.24
Dividend Yield 3.10%
Debt Rating A
Beta 0.34
HOLD
Strong brand
Economies of scale Cohesive franchisee system
International growth opportunities
High profit margins Pays a dividend
Market share leader Vulnerable to currency exchange
Highly competitive industry Obesity propensity
Threat of Competition: HIGH Threat of New Entrants: LOW Threat of Substitutes: HIGH Power of Suppliers: MODERATE
Power of Buyers: MODERATE
McDonald’s is the leading global foodservice retailer with more than 34,000 local restaurants serving nearly 69 million people in 119 countries. The company operates in the United States, Europe, the Asia/Pacific, the Middle East, Africa, Canada, and Latin America. The restaurants offer various food items, soft drinks, coffee, and other beverages, as well as breakfast menus. McDonald’s employs 1.8 million people. It also franchises 80% of its restaurants. The company was founded in 1940 and is based in Oak Brook, Illinois.1
1 Yahoo Finance
Pros:
Cons:
Porter’s Five Forces:
Brief Overview
Recommendation:
2
The EIF purchased 365 shares of McDonald’s (MCD) on March 6, 2009. Each share was worth $53.98. Now, McDonald’s shares are trading at $98.51. This yields a 115% total return including dividends. McDonald’s is the second best performer in the consumer staples sector, after Diageo Adr with a total return of 120%. MCD stock also provides a solid dividend yield and the fund is currently receiving a 3.16% annual return. Currently, the consumer staples sector compromises a 16.23% of the EIF portfolio. The target for this semester is 11.66%. This difference makes the fund overweight in the consumer staples sector by 4.57. Although the sector is currently overweight, I don’t see any reason to sell MCD stock. The company is trading at its 52 week high, but dividends received and the capital appreciation still makes this stock worth owning
Consumer Staples
Altria Group Inc 793 $24,931.92 4.88% $ 23,512.45 2.90% 2.03%
Diageo Plc-Sponsored Adr 246 $28,678.68 4.88% $ 21,505.32 2.66% 1.86%
Mcdonald's Corp 365 $19,702.70 4.88% $ 32,196.00 3.98% 2.78%
Procter & Gamble Co/The 460 $26,367.20 4.88% $ 36,073.68 4.46% 3.12%
Starbucks Corp 510 $26,229.49 4.88% $ 27,351.30 3.38% 2.36%
2,374 125,910 0 140,639 17.37% 12.15%
Company Name Ticker
Cost Per
Share Current
Price
Equity Holding Period
Total Return (%)
Equity Holding
Period Total Return ($)
Equity YTD Appreciation Return (%)
Equity YTD
Total Return
(%)
PE Ratio TTM
Equity Percentage
Dividend Yield
Correlation
Altria Group Inc MO 34.17 33.61 0.9496296 $25,731.93 13.36% 20.96% 15.20 2.87% 5.24% 0.396924804
Diageo Plc.-Sponsored Adr DEO 70.7 123.249 1.198117 $20,837.89 40.98% 46.07% N/A 3.26% 1.83% 0.711924381
McDonald’s Corp MCD 53.98 98.51 1.145804 $22,575.43 -1.81% 2.14% 18.38 3.87% 3.13% 0.577851496
Procter & Gamble Co/The PG 57.32 76.61 0.4638683 $12,230.91 14.84% 19.61% 19.34 3.79% 2.93% 0.53222093
Total
3597.6072 0.855463932 $625,247.97 36.54% #VALUE!
100.00%
Portfolio Considerations
3
-MCD stock is not strongly correlated with any of the stocks in our portfolio. Purchase Rationale The Educational Investment Fund decided to purchase a 3% position of McDonald’s (MCD) on the recommendation of Anna Kruhavets.
Main supporting arguments:
One of the most valuable brands in the world
Market leader in virtually every country it has a presence Superior performance and positive long-term outlook Well-covered dividends Upside history More defensive business model in the restaurant industry2
The fast food industry provides quick-service food products to consumers. Customers usually pay before eating. The purchases are usually consumed on-site or taken out for home consumption. These companies are involved in retail, transport, distribution, and food services. The key economic drivers for the industry are global consumer spending, consumer sentiment, and world price volatility of agriculture. The industries that supply the food industry are the global agriculture, hunting, forestry and fishing industries. 3 According to the National Restaurant Association, the full-service restaurant segment is projected to post its third consecutive year of real sales growth during 2013. Total sales are expected to be $208 billion, up 2.9% from $202.2 billion last year.4
2 Anna Kruhavets report 2009
3 Ibis World
4 National Restaurant Association
Industry Overview
4
During the past 5 years, the global fast food industry has expanded despite changing consumer tastes and the struggling economy. During recessions consumers cut down on luxuries like eating out, but fast food restaurants like McDonalds were not greatly affected. On the other hand, increasingly health conscious has hurt the demand for greasy foods provided by these restaurants. Restaurants have responded by increasing the number of healthy option on their menus. Moreover, the growing demand from emerging economies boosted the industry’s overall performance. In many developed nations the industry is approaching saturation levels. The reason for this is the oversupply of fast food businesses and extensive franchising. This results in weaker revenue growth and intense price-based and product-based competition. Over the next five years many fast food chains will start to introduce new healthy food alternatives and expand their current product lines. This will include fresh items, organic produce, and much less fried items. It is possible that these personalized changes will involve less standardization but consumers are more willing to pay higher prices for healthier foods. The personalization and the continued expansion into emerging markets will result in revenue growth of 4.5% per year on average to $623.6 million up to 2017.5 The two major players are McDonald’s Corporation and Yum! Brands Inc. McDonald’s held 20.9% of the market share in 2011. Yum! Brands held 11.9% of the market. The next market share leader is Subway with an estimate market share of 3.5%.
Global fast food restaurants will benefit as the global economy improves and consumers continue to spend again on luxuries like eating out. The primary expansion driver of industry growth will be the expansion of US-based fast food chains. The global consumer
5 Ibis World
5
spending is expected to increase at an average annual rate of 3.5% and the demand for fast foods will increase in line with this expansion.
Moreover, the competition is very likely to intensify in the next couple of years especially in developed nations. This, in hand, will increase the price-based competition and the emphasis on the regular introduction of new products. The oversupply of the fast food business has weakened revenue growth, demand, pricing, and product competition. These trends, along with health issues concern analysts. The high number of obese children can also be attributed to fast food restaurants. Obese children and the aging population that demand less fast food is also a concern. Major operators will look to expand their revenues and profits by offering healthier and less costly alternatives to red meat items. These less costly alternatives and healthier products will reduce industry margins.
Given these factors, some single-product operators, such as those of only hamburgers, will face the greatest risks over the next 5 years. Therefore, it is expected that Asia and the Middle East are regions where the US-based fast food brands have not saturated the market yet and where these operators are booming. Newly industrialized nations such as
6
India, Russia, and Brazil will also increase their consumption of fast food as their average incomes continue to grow and people can afford to purchase Western fast food. These Western food chains will have to incorporate more local traditional cuisines to prosper.
On the other hand, restaurants will continue to consolidate and underperforming stores will close, particularly in developed markets. Profit margins are expected to weaken as the industry continues to mature and prices remain steady or decline. This is where McDonald’s should be emulated. The company has increased its success by expanding their menu to include high margin food items such as coffee and smoothies. These low-costs, high-profit items offer a great way to increase revenues and increase bottom lines.
Revenue Outlook
Figure 2 Ibis World Graph
The global fast food industry is in the growth phase of its industry life cycle. The industry value added, which measures an industry’s contribution to the overall economy, is
Year Revenue $ billion Growth %
2013 526.2 5.3
2014 551.0 4.7
2015 574.3 4.2
2016 600.0 4.5
2017 623.6 3.9
2018 645.6 3.5
7
forecasted to increase at an annualized rate of 2.9% until 2017. Even though it is less than the expected global GDP growth, over the long term the industry is expected to outperform the global economy. The key external drivers are global consumer spending, the consumer sentiment index, and the world price volatility of agriculture. The growth of this particular industry is very sensitive to changes in global consumer spending. During recession, unemployment causes decreases in consumption levels. If personal consumption is high, consumers are more likely to spend money on eating out. Since global consumer spending is expected to increase, the industry is provided with an opportunity for growth. Changes in consumer sentiment also greatly influence household expenditures on discretionary items such as fast foods. If consumers are optimistic about the economy they spend more on these particular items. East Asia is one of the largest sources of revenue growth and expansion for the industry. The ability of the industry to prosper and gain profits depends on the performance of the region’s economy and the demand for fast foods. Last but not least, the world price volatility of agriculture is also a strong indicator of the prices that fast food restaurants can expect to pay for their supplies. If the price of the ingredients goes up then the costs increase and profit margins shrink because the extra costs are not passed on to consumers. This particular driver is expected to increase in the following years as well. The fast food industry has grown during the past 5 years. This has been the case even though the economy has been hit hard and costumers have also been aware of the health risks with a diet high in fat, salt, and sugars. Even with these factors, the industry has experienced growth in emerging markets. As the economy plunged into recession consumers were more selective of how they spend their disposable income. In 2009 global consumer spending declined 0.9%. Luxuries such as eating out were the most affected. Many consumers cut out fast foods from their diets, and others simply moved towards the lower priced items in fast food restaurants. This forced companies to promote their restaurants as the place to get the greatest value for their money.
Industry Performance
8
In developed nations the industry is approaching saturation levels because of the oversupply of fast food businesses and extensive franchising. Because of this, the industry is experiencing weaker revenue growth and demand, intense price-based and product-based competition. Developed nations and regions make up a large percent of industry revenue in 2012. Many operators in developed nations particularly expanded their menus to ensure that they retain their customers.
On the other hand, operators have been pushing into emerging markets. These markets include Asia, Russia, South America, and India. These countries are attractive because of their large populations and rapid population growth. They also have a large share of younger age groups that are the main consumers of fast foods. Likewise, these emerging economies also have increasing incomes and a growing middle-class that desire Western foods.
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MAJOR MARKETS
Threat of Competition – High The competition in the fast food industry is high and the trend is increasing. Operators compete on the basis of price, location, food quality and consistency, style and presentation, and food range. New products are constantly being introduced because variety greatly affects consumer demand. Service is also expected to increase in quality. Restaurants are constantly implementing strategies such as drive-thru. The competition between franchises and locally operated fast food restaurants adds to the competition. Even though the single-location fast foods account for a small share of restaurants their share of industry revenue is larger. They have successfully established their restaurants in high traffic locations and at the same time in marketing their brands. Threat of New Entrants – Low The fast food industry is made up of large chains that already count with economies of scale, distribution channels, and technological advances. On the other hand, low start-up costs make it easy to compete in the industry. Although there are many competitors entering the market, on the global scale the giants like McDonald’s are still in advantage. It
Porter’s Five Forces
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is very unlikely that the new entrants will take any significant market shares. Fast food giants like McDonald’s count with brand loyalty that makes it hard for new entrants to pose a threat.
Barriers to Entry6
Barriers to Entry checklist
Level/Impact
Industry Competition
High
Industry Concentration
Low
Life Cycle Stage
Growing
Capital Intensity
Medium
Technology Change
Medium Regulation and Policy
Heavy
Industry Assistance
None
Threat of Substitutes – High Fast foods are discretionary items that are easily substituted by other types of meals . These might include meals prepared at home, dine-in restaurants, deliveries, and meals supplied at convenient stores. Since customers have become more aware of the health effects of fast foods other substitutes are becoming more and more attractive. Vast amounts of money have been spent on marketing and promoting healthier fast foods to be able to compete with healthier options. Restaurants need to change the image customers have and at the same time increase brand awareness. Power of Suppliers – Moderate 7Supplier relations are very important to this industry. The prices charged by suppliers are
the major factors that affect net income. Although the supplies are commodities and
suppliers do not have the ability to charge more than the market, operators do not have the
chance to bargain for cheaper products
or large quantity discounts. Good
relationships are crucial to this
particular industry so that large
quantities of supplies are available
when needed. Lastly, although there
6 Ibis World
7 IbisWorld
11
are many suppliers, location is extremely important. So suppliers closer to the operators
substantially influence transportation costs. The fact that suppliers do not have the ability
to increase prices but operators do not have the ability to bargain makes supplier power
moderate in the fast food industry.
Power of Buyers – Moderate
Although customers do not have the power to influence price directly, they influence it
greatly. With the social media and health concerns customers can readily supply opinions
and influence others with these. All companies in the fast food industry must adhere to
social regulations; spend in enhancing their brand reputation, and promoting quality
standards so that customers feel safe and content when consuming their products.
HISTORY8
McDonald’s began in 1940 when brothers Maurice and Richard McDonald opened their first restaurant in 1398 North E Street at West 14th Street in San Bernardino, California. Their introduction of the “Speedee Service System” in 1948 advanced the principle of our modern fast-food restaurants. The original mascot of McDonalds was a man with a chef’s hat on top of a burger shaped head. His name was “Speedee”. In 1967 Speedee was replaced with Ronald McDonald when the company decided to file a U.S. trademark. The company first filed for a U.S. trademark on the name in 1961 with the description of “Drive-In Restaurant Services” which continues to be renewed. The same year the company filed a logo trademark on the double arched “M” symbol.
In 1954 Ray Kroc was surprised with a huge order of 8 multi-mixers from the restaurant in California. When he decided to follow-up he found a small successful restaurant run by two brothers called Dick and Maurice McDonald. He was shocked with the effectiveness of the
8 Wikipedia
Company Overview
12
operation. The brothers owned a limited menu of burgers, fries, and beverages which allowed them to concentrate on quality over quantity. Stunned as he was, he pitched to them his vision of creating McDonald’s Corporation. Five years later Ray bought the exclusive rights to the name McDonald’s. By 1958, McDonald’s had sold is 100millionth hamburger. Ray ran McDonald’s with two philosophies in mind: “In business for yourself, but not by yourself” and he also wanted his burgers, buns, fries, and beverages to “taste the same in Alaska as they did in Alabama.”9
His principle consisted of a 3-legged stool. One leg was McDonald’s, the second were the franchises, and the third were suppliers. Kroc also believed that the entrepreneurial spirit should be rewarded so he rewarded his individual franchises when they were creative. Many of McDonald’s famous menu items were created by the franchises. Although creativity was rewarded, Ray made sure that the founding principles of quality, service, cleanliness, and value were still core to each individual business. In 1961 Ray launched a
training program called Hamburger University. Here franchisees and operators were trained in the scientific methods of running a successful McDonald’s. The university also had a laboratory where students could develop, cook, and serve to create new methods. With all its expansion into international markets, the company has become a symbol of globalization and spread of the “American way of life.” Now the company headquarters
are located in Oak Brook, Illinois. The company employs over 440,000 people worldwide and their revenues are more than Subway and Yum! Brands combined. McDonald’s has restaurants in North and South America, Europe, Australia, Asia, the Middle East and Africa. The main products are hamburgers, cheeseburgers, chicken meals, fries, coffee, and milkshakes. Although these items are not seen as healthy, the company has made tremendous efforts to educate consumer and add healthy organic items to their menus. These include wraps and salads.
Currently, McDonald’s is the leading global foodservice retailer with more than 34,000 local restaurants that serve approximately 69 million people in 119 countries around the world each day. More than 80% of the restaurants worldwide are owned and operated by independent local people.
9 McDonald’s History
13
The alignment of the company, its franchises, and suppliers has been key to the company’s success. The business model enables McDonald’s to deliver consistent, locally-relevant restaurant experiences to customers and at the same time be an integral part of the community. The company’s model also enables it to identify and implement innovative ideas that meet customer’s chaining needs and preferences. It provides a common framework for global business but also allows for local adaptation. Its main strategy consists of winning the five elements of people, products, place, price, and promotion.
McDonald’s is now more aware than ever of the increasing trends of nutrition and fitness. Whether it’s a quick breakfast, lunch or dinner, customers look for quality at a great value. McDonald’s goal is to “continuously improve the classic offerings and increase the number and variety of new options that deliver the great taste and balance that customers seek.”
The company offers customers a way to learn about nutrition information. The company has been guided by the Global Advisory Council to continue to evolve the overall approach while still meeting customer expectations.
OUTLOOK FOR 201310
McDonald’s will continue to build the business in 2013 by enhancing customer experiences
across the pillars of their Plan and the three global growth priorities. This way they will be
able to optimize their menus, modernize their customer experiences and broaden
accessibility to the brand. The company possesses a brand advantage in convenience,
variety, value, and viable business model. McDonald’s will highlight promotions of the core
menu items, while strategically expanding the menu with relevant new offerings. They will
also place an emphasis on scaling success quickly around the globe.
10
McDonald’s 10-K
Outlook
Strategic Direction
14
In 2013 the U.S. business will focus on driving sales and guest counts by enhancing the
entire customer experience. The company will satisfy customer needs with the food they
crave by balancing core favorites with limited time offers an innovative products. Menus
will also include brand messages that highlight quality of food and ingredients, efforts to
promote children health and well-being of the community. Finally the company is
remodeling about 800 locations in the U.S.
In Europe the company sees growth opportunities in the breakfast menu and beverages.
Around 300 new restaurants will be opened in Europe in 2013. McDonald’s believes that
despite the headwinds due to economic uncertainty and government austerity Europe
offers significant long-term opportunity and the company is positioned to capitalize on the
potential benefits.
Finally, in the rest of the world the company’s goal is to make investments that elevate the
experience and drive sustainable growth. McDonald’s focuses on markets that generate
acceptable returns or that have opportunities for growth.
HOLD
Recommendation
15
Strong brand because of increased spending in marketing and quality. McDonald’s is
one of the world’s largest giants in the fast food industry. It has created strong customer loyalty and reputation. With the increased healthy items on the menu and the specialized items in each country the company serves more customers.
Economies of scale because the company counts with many different restaurants, including franchises, around the world that help the company enjoy the benefits of economies of scale.
Cohesive franchisee system that accounts for about 80% of the restaurants. MCD receives a franchisee fee for each franchisee it leases.
An international growth opportunity since the company has been pursuing growth opportunities in emerging markets. McDonald’s targets each country differently. It customizes products and expands into markets where there is an emerging middle class that is willing to spend in Western foods.
High profit margins because the company counts with loss cost and higher priced items that increase the profit margins.
Pays dividends that helps the fund pay-off investors and enjoy returns.
Market share leader since McDonald’s owns 20.9% of the world market share of fast food restaurants.
Slow but steady growth since the economy is bouncing up after the recessions and the Fiscal Cliff uncertainty.
Vulnerable to currency exchange because McDonald’s franchises and restaurants are located all around the world. At the same time supplies are bought from all around the world so the company faces increased currency risks.
Trading at its 52 week high right now. MCD is not an attractive stock to purchase at the moment, but because of the dividend yield and sustainable growth it is one to keep.
Overweight in the portfolio with regards to equity stocks.
Highly competitive industry affects revenues and growth potentials. Companies competing in such a highly competitive industry are faced with increasing price
Pros to Recommendation
Cons to Recommendation
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rivalries and marketing expenses that reduce profit margins and in general the bottom line.
Obesity propensity is currently becoming an issue. Increased health effects and social media have made customer aware of the health factors associated with consuming greasy fatty foods. Fast food restaurants need to increase their organic and healthy meal options to compete in a society that is leaning towards healthier lifestyles
TRENDS:
Current Month Last Month Two Months
Ago Three Months
Ago
Strong Buy 5 5 5 4
Buy 10 10 10 11
Hold 13 13 13 12
Underperform 1 1 1 1
Sell 0 0 0 0
Analyst Recommendations
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Cons to Recommendation
R Ratio Analysis Yum BKW SBUX
Profitability Ratios 2010 2011 2012 2012 2012 2012
Profit margin 20.5% 20.4% 19.8% 10.58% 5.99% 10.50%
Gross margin 45.8% 56.6% 56.3% 71.58% 64.80% 57.35%
ROA 15.5% 16.7% 15.4% 17.90% 2.11% 14.29%
ROE 33.8% 38.2% 35.7% 48.45% 10.52% 29.45% Liquidity Ratios
Current 1.49 1.25 1.45 0.87 2.24 1.85
Quick 1.46 1.22 1.41 0.49 1.82 1.14 Debt Utilization
Debt to Equity 1.18 1.29 1.31 66.4 59.21 77.4
Leverage 2.18 2.29 2.31 4.49 5.02 1.64 Asset Utilization
Asset Turnover 0.75 0.82 0.78 1.02 0.35 1.71
Inventory Turnover 118.83 100.28 98.94 13.22 N/A 5.27 Valuation Ratios
P/E 15.4x 15.9x 17.3x 19.49 31.62 19.3
Price/Book 5.6x 7.2x 6.3x 13.55 4.9 7.7
Price/Cash Flow 12.9x 14.5x 13.8x 13.01 25.62 62 DuPont Analysis
Profit Margin 20.5% 20.4% 19.8% 10.58% 5.99% 10.50%
Asset Turnover 0.75 0.82 0.78 1.02 0.35 1.71
Leverage 2.18 2.29 2.31 4.49 5.02 1.64
ROE 33.8% 38.2% 35.7% 48.45% 10.52% 29.45%
ATIO ANALYSIS
Profitability Ratios
McDonald’s is leading the industry with regards to profit margins. It went slightly down in 2012
because of the slight increase in tax expenses from 2011 to 2012. The company is slightly below
than competitors with regards to gross margins because McDonald’s has been focusing on quality
and this has increased cost of goods sold slightly. Return on assets decreased slightly in 2012
because of total assets increased, but it is still a healthy one. Return on equity is healthy, although it
is slightly below its competitor Yum.
Ratio Analysis
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Liquidity Ratios:
MCD’s ratios are in line with competitors, but the company has slightly lower ratios than Burger
King. This is of no issue because the company has the ability to drive sales and produce cash to pay
debt quickly with promotions and advertisement.
Debt Utilization Ratios:
Debt to equity has increased slightly because of the increased growth into emerging economies. The
company does not finance its growth with debt as heavily as competitors. The company is at less
risk of bankruptcy than its competitors. Leverage is relatively low with regards to competitors as
well.
Asset Utilization Ratios:
Utilization ratios are very healthy. Asset turnover is a little lower than competitors because of the
lower profit margins with value meals and the healthy approaches they are expanding towards. On
the other hand, inventory turnover is extremely healthy. The company turns over inventory faster
than any other company in the industry. This is crucial in an industry where goods are perishable.
This can also be attributed to the pricing strategies they have and the number of clients that
consume McDonald’s every day.
Valuation Ratios:
Valuation ratios are constantly growing but are relatively lower than the competitors. This
demonstrates that investors are willing to pay more each year for MCD stock. On the other hand,
they are willing to pay less than what they would for competitor stocks. This can be attributed to
the fact that competitors have greater growth opportunities. That being said, McDonald’s is still a
market leader.
Revenue I projected revenue taking into consideration the last three year’s averages and my opinion on how fast the company is growing. Due to increase in disposable income and consumer spending, I find
Assumptions
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that a 4% growth rate is appropriate and conservative for the market leader in the fast food service industry. Cost of Revenue I used an estimate based on previous years and management discussion to determine the cost of revenue at about 44% of revenues. Operating Expenses I estimated operating expenses using the three year average and the percent of sales approach. Taxes I used a 31% tax taking into consideration management discussions and the three year average. Risk Free Rate I used the 30 year Treasury bond rate of 3.60% Market Risk Premium I used 5.7%, the 80-year historical rate. Beta For beta, I used several analyst opinions as guidance, but ultimately I used the beta I obtained from my regression analysis. Capital Expenditures I estimated capital expenditures to decrease at approximately 12 each year, the average decline of CAPEX over the last three years. Dividends I estimated future dividends based on 2012 dividend growth. P/E For the P/E ratio I used analyst opinions and value line estimates as guidance.
20
McDonald's Fails to Boost Sales With Dollar Menu
McDonald's managed to eke out a higher profit for its first quarter even as the world's biggest
hamburger chain failed to lift sales with its Dollar Menu.
The company said Friday that an important sales measurement fell 1 percent during the period
and warned that it's expected to dip again in April.
That marked the first quarterly decline in a decade in sales at restaurants open at least 13
months and underscored the troubles the company has been facing.
As Burger King and Wendy's have stepped up their marketing over the past year or so,
McDonald's has responded by aggressively touting its Dollar Menu and other value deals to hold
onto customers in an industry where imitation is rampant.
The strategy has caused concern among analysts who worry that it could eat into profit margins.
It's also rankled some McDonald's franchisees, who operate the vast majority of its restaurants
in the U.S.
But in a conference call with analysts Friday, McDonald's executives insisted that offering
cheaper prices was necessary in the current climate. Since the restaurant industry is barely
growing, they said McDonald's needs to steal customers away from rivals to grow.
"That battle for market share has become so critical for the long-term health of business, we're
willing to sacrifice that margin," said Peter Bensen, the company's chief financial officer.
Although profit margins declined during the first quarter, McDonald's noted that it picked off
market share in many parts of the world, including the U.S.
But there are signs such deals aren't sitting well with the independent franchisees who operate
restaurants.
A survey by Janney Capital Markets released this week found that a sampling of 25 U.S.
franchisees who collectively operate 180 McDonald's restaurants on average rated their relations
Current Events
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with the company below their historic levels. Janney said some complained about excessive
coupons and discounts.
Meanwhile, McDonald's emphasis on the Dollar Menu, which began last year, has had a ripple
effect in the industry. Burger King recently said it's retooling its strategy and is now touting a
deal for a $1.29 Junior Whopper, among others. Wendy's also revamped its value menu last
year, saying it wants to offer customers more options.
The focus value menus and deals, which have long a staple in the traditional fast-food industry,
is in contrast to attempts by the same chains to evolve and adapt to changing tastes. As more
people flock to places such as Chipotle and Panera McDonald's has also tried to freshen up its
offerings and raise the image of its food. In addition to the chicken McWraps, for example, the
company is rolling out a version of its Egg McMuffin made with egg whites next week.
Such items are generally more expensive, and CEO Don Thompson noted that they could help
improve margins in coming quarters.
For the three months ended March 31, the global sales drop included a 1.2 percent decline in the
U.S. The sales figure fell 1.1 percent in Europe, the company's biggest region by sales.
It fell 3.3 percent in the region encompassing Asia, the Middle East and Africa, reflecting
weakness in Japan and a 4.6 percent drop in China. The company blamed the decline partly on
the aftereffects of the recent scare of the chicken supply for KFC, which is owned by Yum Brands
Inc.
McDonald's Corp., based in Oak Brook, Ill., has more than 34,000 locations worldwide, about
14,000 of those in the U.S.
For the quarter, it earned $1.27 billion, or $1.26 per share. That compares with $1.267 billion, or
$1.23 per share, a year ago.
Revenue edged up 1 percent to $6.6 billion.
Analysts expected a profit of $1.26 per share on revenue of $6.59 billion, according to FactSet.
Shares fell $1.99, or 2 percent, to close at $99.92 Friday.