McDonald’s Corp. is eyeing opportunities to gain global market share by continuing to optimize its menu, updating restaurants and expanding tiered value and premium-item promotions, executives told analysts in a call following the company’s third-quarter earnings report.
Net income rose 9 percent and global same-store sales increased 5 percent for the quick-service chain of more than 33,000 global restaurants, during a quarter in which commodity inflation pressured margins significantly.
Officials remain confident in the fourth quarter and going into 2012, said chief executive Jim Skinner.
“The [worldwide] informal-eating-out industry is growing at a slow pace, so we continue to be in a market share battle,” Skinner said. “Any victories will continue to be hard-won.”
U.S. pricing, product tweaks
McDonald’s U.S. battle plan may involve price increases in the short term and a menu development strategy built upon incremental improvements.
The chain’s U.S. same-store sales rose 4.4 percent, despite an 8-percent jump in the cost of goods during the third quarter, said chief financial officer Pete Bensen. McDonald’s now expects 2011 food inflation to be between 4.5 percent and 5 percent. Two price increases this year — 1 percent in March and 1.4 percent in May — have partially offset that pressure, he added.
“With food-at-home inflation rising faster than food-away-from home, that might allow for additional pricing actions in the near term,” Bensen said.
“The biggest driver of our pricing strategy is our consumer and how they feel about our pricing,” Skinner said. “We take it all into consideration, mostly the index of food at home and food away from home, but maintaining everyday affordability is paramount.”
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McDonald’s menu in 2012 will likely focus less on new products and more on extending established lines, Bensen said, similar to its addition of new McCafé flavors and the introduction of Angus Third Pounder burgers this year.
“We’re at a 4-percent comp through the first nine months with a combination of line extensions and limited-time offerings, from the introduction of oatmeal to the BBQ Bacon flavor of Angus [Third Pounders] or the Asian Salad [limited-time offer] and new beverages,” he said. “As we review the 2012 calendar for the U.S., it feels like a similar year in 2011.”
In the third quarter, McDonald’s introduced Frozen Strawberry Lemonade and a Mango Pineapple Real Fruit Smoothie to the McCafé line. That beverage program exceeded its sales from the third quarter of last year by 16 percent, Skinner said.
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McDonald’s menu upgrades would focus on all dayparts and menu tiers, he said.
The company will also continue its strong levels of U.S. advertising, he added.
“We need to communicate at the same levels or greater in difficult times as in halcyon times,” Skinner said. “That’s been the case forever around here. We’re very balanced in our communications, because we don’t have the luxury of pushing one side of the business versus others.”
The U.S. reimaging program, which is on track to refurbish 600 restaurants by the end of the year, focuses both on improving capacity and refreshing décor, officials said.
“The majority of [restaurants to be remodeled] have an opportunity to undergo a major improvement,” Bensen said. “When we’re able to add a side-by-side drive-thru, we’re seeing the greatest sales increase, exponentially improved from any sales lift you get just from doing the interior and exterior.”
For reimaged restaurants that can’t accommodate a double drive-thru, McDonald’s has deployed staffers with hand-held ordering devices to speed through-put, Bensen added. The United States has about 1,000 such units.
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Resilience, opportunity in foreign markets
McDonald’s European division recorded a 4.9-percent increase in same-store sales in the third quarter, despite several countries steeply cutting budgets and increasing taxes in response to the sovereign debt crisis.
“We’re not seeing a big impact from austerity measures and economic issues in Europe,” Skinner said. “We’ve been through ups and downs in Europe before, and have had steady results because of our everyday affordability. Lifestyles would have to be severely affected for us to feel an impact there.”
The reimaging program continues apace in Europe as well, Bensen said. France is on track to upgrade all of its restaurant interiors and half its exteriors by the end of the year. The United Kingdom will complete all remodels by the end of 2012.
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Japan and China each will remodel about 100 restaurants this year, Bensen added. About 20 percent of China’s unit base reflects the brand’s new look, increasing to 40 percent next year due to continued remodeling and new restaurant openings.
China is expected to meet its unit count growth target of about 200 new locations for 2011, Bensen said. The country saw same-store sales rise 11.3 percent in the third quarter, in addition to double-digit gains a year earlier. Guest counts grew in the double digits in both the third quarter of 2011 and 2010.
New locations take longer to open in China than in other countries, Skinner said. To achieve the market’s average unit volume, McDonald’s has opened restaurants early in the construction of large new retail centers in major cities. But the incremental sales lifts in the second and third years for those locations more than offset the slow start, he added.
As McDonald’s accelerates its openings in China, mature units also will mitigate modest opening average volumes, Bensen said. Reimagings would boost sales, he added, as they have begun to at remodeled European restaurants.
“In Europe [at remodeled stores], those first-year comps are up 6 percent to 7 percent ahead of the marketplace,” Bensen said. “Yet more than the sales increases above the market, [remodeling] also drives improvements in customer attitudes and their perceptions about cleanliness, quality of service and the food. It’s increasing loyalty and driving repeat business, and it’s performing the way we expected it to.”
Oak Brook, Ill.-based McDonald’s system includes more than 14,000 locations in the United States and more than 19,000 restaurants abroad, about 80 percent of which are franchised.
Contact Mark Brandau at [email protected].
Follow him on Twitter: @Mark_from_NRN