The Global Slowdown Finally Slows Down McDonald's
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The lingering global downturn is finally affecting McDonald’s Corp. (NYSE: MCD) which seems to be catching a cold. The instability spread across the globe and the uncompromising rising expenses are threatening the second quarter results of the US fast food giant.
The May sales of the company slipped below Wall Street estimates for its largest markets, the US and Europe, while growth in the Asia/Pacific, Middle East & Africa (APMEA) cooled. In addition to this, the Illinois based company fears foreign currency translation to hurt the quarter’s earnings by 7 - 9 cents per share.
Let’s come to the key metric. On Friday, McDonald’s reported the monthly comparable sales number which represents the revenue of all outlets which were in operation for at least 13 months or more. It also includes those restaurants that were temporarily closed. Overall, global sales increased 3.3 percent. The key revenue drivers were the strengthening sales in the domestic market and Europe which witnessed a jump of 4.4% and 2.9% respectively. The key metric was pulled down by the gloomy results in the geographical segment of APMEA where sales fell 1.7% compared to the year ago figure.
What Impressed the US and Europe?
Despite the sluggish nature of the recovery, the US market posted good numbers for McDonald’s. Credit this to the addition of the new blueberry banana, walnut oatmeal and Cherry Berry Chiller to its menu, which drove the sales.
The world’s biggest hamburger chain was also concerned with the European debt issues; however, it was more resilient than its competitors. The revenue in the region was driven by the company’s current restaurant renovation which boosted sales in the United Kingdom, Russia, and France. The combination of premium and everyday value options in its menu were also responsible for pouring money into its bucket.
What Went Wrong in the Asian Market?
Japan and China are the biggest markets of McDonald’s in the APMEA region. The company experienced softer results in these growing markets. The new ‘value dinner’ promotion that brought down average checks per visit is suspected to be the reason of softer results in China. Also, McDonald’s continues to face the challenge of molding its menu to suit local taste buds. In addition, it is working to get better results with convenience enhancement for delivery in some of the Asian markets.
Increasing Competition
The company is facing increased competition in the growing Chinese economy which is attracting fast food chains for expansion. Westerners including archrival Yum! Brands (NYSE: YUM) and the coffeemaker Starbucks (NASDAQ: SBUX) are eyeing the nation to be part of the growth tale.
The fact that Yum! Brands, which is the largest western fast food restaurant chain in China is feeling the heat too, should bring some relief to the Big Mac seller. The economic slowdown has not spared Yum either. Yum, which has over 4,600 outlets in China, is rigorously expanding to take advantage of the economy’s growing middle class. McDonald’s also has plans to expand in the region and fight the competition.
Starbucks also has ambitious expansion plans in the nation. The coffee chain, which currently has 570 stores, proposes to have 1,500 cafes in China by 2015. Other than Starbucks, US coffee chain Dunkin’ Donuts of Dunkin' Brands (NASDAQ: DNKN) too has expansion plans in the mainland. McDonald’s which sells coffee too, is surely going to witness severe competition from both.
Not only in China, McDonald’s is facing stiff competition in its US, Germany and Japan markets as well. The fast food industry is getting aggressively competitive where survival of the tastiest is the mantra.
The Bottom-Line
McDonald’s has one of the best business models which can sustain through the difficulties and challenges in the macroeconomic environment. The prevailing slowdown may be eating away some profits, but the Big Mac king is sure to emerge.
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