The company shifts focus as low consumer confidence and sluggish economy persist
McDonald’s Corp. will respond to the company’s decline in profit in the second quarter with increased marketing around value, company officials said in a call with analysts on Monday.
McDonald’s has managed its business through sluggish economies in its largest markets before, said new chief executive Don Thompson, but the second quarter of 2012 was one of the first times in recent memory that such a severe slowdown seemed to spread everywhere the brand operates.
“Now is the time to focus on guest count growth and market share gain,” Thompson said. “We go hard at that in times like these, even though it means an investment.”
Shifting focus to value could result in short-term pressure on the brand’s average check, McDonald’s officials acknowledged, but shoring up traffic now would allow the chain to hold on to its customers and coax them into buying regular-price items as the global economy improves over the long term.
“What we’ve employed historically is [a strategy where] we have to be in the best position to drive traffic and trade people up,” Thompson said. “We’re seeing results in guest count movement, but we won’t see sales flow down to the bottom line until we’ve gotten in a position to trade those guest counts up.”
Competition heats up in U.S.
With same-store sales slowing sequentially from an 8.9-percent increase in the first quarter of 2012 to a 3.6-percent gain in the second quarter, McDonald’s would need to hit value harder in its domestic marketing, Thompson said.
“Value is not a new thing, the question is how much you address it in your media mix,” he said. “You have to also have a premium product message in the marketplace, and we haven’t given up on that. It’s a tweak in our marketing mix.”
Thompson attributed a deceleration in same-store sales growth in the United States more to increased marketing from competitors like Burger King or Taco Bell than to McDonald’s customers shifting their spending down toward the Dollar Menu.
“That isn’t new — we go through competitor resurgences and ebbs and flows — but we have to be focused on our business plan and execute at the highest levels,” Thompson said. “There is an increase in marketing spending by many folks in our competitive set, and we need to make sure our share of voice is still resonating.”
Value would always be a major factor, he added, but the company would continue to balance that message with new product news like the Cherry Berry Chiller beverage and Spicy McBites offers of the past quarter. He said consumers could expect some premium sandwiches similar to the recently tested Pub Burger “next year for sure” and possibly as soon as the latter half of 2012.
Year-to-date, McDonald’s has remodeled 330 restaurants in the United States, which produce a significant lift to those locations’ same-store sales.
Confidence wanes in Europe
Chief financial officer Pete Bensen said McDonald’s global diversification across the United States, Europe and emerging markets usually would hedge the company against a faltering economy somewhere, but this did not materialize in the second quarter due to a widespread decrease in consumer confidence around the world and especially in Europe.
“We’re employing different tactics in each market, but the common theme is increasing value in the short term to drive traffic, a critical element to sustaining long-term growth,” Bensen said.
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Many markets in Europe are experiencing a slowdown in guest traffic, but McDonald’s is faring better than the competition, Thompson said. The systems in the United Kingdom, France and Spain gained market share in the quarter, while Germany and Italy maintained market share.
Russia was one of the segment’s strongest performers based on its focus on, lunch and beverages, officials said. In the coming months, France would increase its marketing expenditures for its Petit Plaisirs value menu, while Germany hopes to sustain momentum for its McDeal combo meals, which cost slightly less than 4 euros.
But officials reiterated that McDonald’s would have to consistently advertise its value messaging, as lower consumer confidence likely would persist across the continent.
“Now that the downturn has persisted for so long — and in Europe, gotten so much deeper — it’s starting to constrain consumer behavior,” Bensen said. “In some markets, the informal-eating-out market is just declining, and the magnitude of issues in Europe is having ripple effects around the world. All in all, it means more flattish-to-declining eating out around the world.”
Sign of traction in APMEA
Some of the chain’s biggest markets in the Asia/Pacific, Middle East and Africa, or APMEA, division are starting to see a contraction in dining out. McDonald’s is fighting back with promotions to drive traffic and began value initiatives in Australia earlier in the year; the strategy began to take root in the second quarter, Thompson said.
Australian customers began shifting some of their use of the Loose Change value menu toward higher-than-average-check purchases like Extra Value Meals.
When Loose Change was introduced at the end of the first quarter, it drove traffic increases but significantly compressed the brand’s average check. Now that Loose Change’s mix of sales has leveled off from initial levels, Thompson is confident that Australia can build long-term sales momentum from the menu and hopefully serve as a model for other major markets.
“Typically, when you bring forward a new value platform, customers sometimes think it will go away, so they’ll use that menu much more initially,” Thompson said. “That does wane, and sometimes that takes six months to happen, sometimes a little less.”
The brand is in the early stages of a new multi-tier value platform in Japan, where post-tsunami energy restrictions continue to constrict the eating-out market. McDonald’s also is trying to balance the value offer with new-beverage news, sampling iced coffee that has been adapted from the McCafe product in the United States.
McDonald’s is feeling the effects of slower growth in China particularly because the brand is concentrated in Tier 1 coastal cities where consumer spending and operating costs are worsening, Thompson said.
“We’re seeing more media and marketing around value products [in China], and we’re in a good position there relative to the overall marketplace,” he said. “It has to be consistent when you execute value, and if our value lunch and dinner and breakfast programs do well, we’ll do well.”
Oak Brook, Ill.-based McDonald’s operates or franchises more than 33,500 restaurants worldwide, including more than 14,000 in the United States.