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After many stumbles, McDonald's takes a small step forward

McDonald's announced its first positive earnings in the US since 2013 this week, a relief for a brand that has been awash in negatives in recent years. 

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    The sun sets behind a McDonald's restaurant in Ebensburg, Pa.
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McDonald’s Q3 results, announced today, show solid global growth and a slight improvement for the U.S., where same-store sales were up 0.9%. Yes, a 2% pricing increase more than covers that gain, and it’s true that the U.S. was the only region to report negative growth in customers counts. And indeed, these numbers lap a weak Q3 2014 when U.S. comps bottomed at -3.3%. But no matter what else factors in, this wasn’t another negative quarter; it was the first positive U.S. quarter since a similar 0.9% gain reported in Q3 2013. And even this small a turnaround sign is a breather for a brand that has been awash in negatives.

The most important change is that “we’re running better restaurants than we were a year ago,” said CEO Steve Easterbrook. Order accuracy and service speed at the drive-thru (source of 70% of its sales) have improved, he said.

Global comparable sales rose 4% as a result of positive comparable sales in all segments. The company now reports results for the market categories into which CEO Steve Easterbrook has divided the McDonald’s system. The U.S. (40% of operating income) is its own category. The International Lead Markets category (Australia, Canada, France, Germany, and the UK) saw a Q3 same-store sales increase of 4.6%. The High Growth Markets category (China, Italy, Poland, Russia, South Korea, Spain, Switzerland, and the Netherlands) validated its name with an 8.9% gain in same-store sales. The remaining 100 countries constitute the Foundational Markets, which also showed positive growth.

Easterbrook tried hard not to oversell the results. “While still in the early stages, we believe our turnaround plan is starting to generate the change needed to reposition McDonald’s as a modern, progressive burger company,” he told analysts. He attributed the Q3 improvement in part to the launch of Buttermilk Crispy Chicken (on the heels of Artisan Chicken) and a return to the “original” Egg McMuffin prep using butter rather than margarine.

The latter may seem a small improvement that consumers might not notice, but Easterbrook said McMuffins “saw a double-digit increase in sales immediately following the announcement.”

Additionally, I’ll speculate that the chatter through September about the coming all-day breakfast launch helped sales in Q3, which the company said ended stronger than it began. As reported earlier, YouGov BrandIndex research did show improving brand perceptions in September.

Analysts tried several different ways to ask Easterbrook to quantify sales results for the two-week-old all-day breakfast initiative. On each repetition, Easterbrook said it was too early to say because sales started very strong: what’s important is where sales level off. But despite tabloid headlines hinting at franchisee revolt, he said 98% of franchisees approved the rollout and “it has gone a lot smoother than perhaps people feared.” The initiative has “broad appeal,” attracting new customers, and it has had “a strong start from an execution aspect.”

One analyst asked about whether the “Summer Lovin’” promotion worked (Easterbrook said it bumped into too many local discount initiatives initially but gained traction). But no analysts asked specifically about a “Pick 2” value initiative that Nation’s Restaurant Newsreported will be voted on soon by franchisees. The platform likely would involve choosing two budget items for $2.

Easterbrook did say McDonald’s will have a “more sustained value platform in 2016” to replace its current hodgepodge of value offers. Some markets are offering a selection of $5 Value Menu bundles. In Chicago the chain has taken a cue from Burger King with a “2 for $5” offer that includes several all-day breakfast items (Hot Cakes with Sausage, Sausage McMuffin with Egg and Egg McMuffin) along with 10-piece McNuggets, Big Mac and Filet-O-Fish.

Despite McDonald’s commitment to reinvigorate the value tier, it’s worth noting that the strongest markets all added new premium sandwiches in Q3. Among International Lead Markets, these included the Create Your Taste rollout and Grand Royal Chilli in Australia; Grand Angus in Canada; Grand Premium in France; Bacon Clubhouse Beef/Chicken and McB organic burger in Germany; and the BBQ Smokehouse and Great Tastes of the World burgers in the UK.

Easterbrook’s overall message was that accelerating this turnaround will require “delivering on what customers want now and laying the foundation for what they expect tomorrow.” He promised “fewer [but] bigger initiatives” to improve customer experience and unit economics.

This article first appeared in BurgerBusiness.

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