McDonald’s Sales Struggle On Asian and European Weaknesses

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McDonald’s (NYSE: MCD) reported a drop in January sales as it experienced declines in the Asian and European markets, though the U.S. same-store sales showed marginal improvement of 0.9% in sales. The fast food chain had already warned of a fall in the same-restaurant sales, which plunged 1.9% in January as the Asia Pacific, Middle Eastern, and African market witnessed a severe 9.5% sales decline.  The Oak Brook company saw a similar fall in Europe, where sales decreased 2.1% compared to a 7.3% growth in the prior year period. The fall came as the Japanese market remained weak while the Chinese economy’s appetite declined on account of supply chain concerns. Let’s take a look at the situation.

Reasons behind falling figures
Japan, which is the largest Asian market with 3,200 outlets, reported a 17% drop in same-store sales for the month. Demand slumped in this market as consumers reduced their spending since the 2011 tsunami and prefer to eat at home. In addition, Japan’s third recession in the past five years is also dampening consumer confidence, resulting in sluggish demand. In fact, McDonald’s is shutting down stores here after suffering a fall in comparable-store sales for 10 months in a row. However, the company is undertaking steps to customize its offerings and stress staples like the Big Mac and breakfast instead of focusing on its Big America Series promotion.

China, the next biggest Asian market, faced some issues with regards to food safety, which led to reduced sales for the food giant. The Chinese food safety agencies recently conducted an investigation through which they discovered that some poultry suppliers of both McDonald’s and archrival Yum! Brands' (NYSE: YUM) KFC outlets used inappropriate levels of antibiotics in their chicken. Though both companies terminated their agreement with these problematic units to ensure consumer food safety, that has adversely affected the sales. Yum! estimates its sales will plunge as much as 25% in the first quarter of the year.

Europe, which is the biggest market for McDonald’s, saw a drop in customer traffic where business saw lackluster growth. Though the UK and Russian market posted good results, they were dragged down by the dull performance in France, Germany, and other markets. Analysts forecast a marginal improvement of 0.1%. However, the company continues to stay focused and expects the situation to improve.

In contrast, the US market saw sales increase, as the company had put in the effort to make some changes in the menu card. The world's top hamburger chain also kept its restaurants open on Christmas in its second largest market. Fast food restaurant chains are targeting budget sensitive consumers in the domestic economy. McDonald’s got back to advertising its Dollar Menu and added the Grilled Onion Cheddar burger to its offering to boost customer traffic in stores. It is testing new items like the chicken wings to attract more numbers and increase sales. Fellow competitor Yum! is experimenting with new items such as the Cantina Bell steak burrito and loaded grillers.

Burger King (NYSE: BKW) also added a molten fudge sundae and chicken nuggets with six dipping sauces to lure price-conscious customers. The company recently got involved in a 'horse meat' scandal in the UK, and so it severed connection with that particular supply unit. The one piece of positive news for the company is that this did not adversely impact its brand perception in the US. In fact Burger King has been gaining market share in the domestic market, as it is luring customers away from McDonald’s with the introduction of salads and snack wraps. While McDonald’s has slowed down a bit, Burger King experienced a 3.5% rise in same-store sales in the US and Canada in 2012 compared to a fall of 3.4% in 2011. It has been aggressively promoting its value menu just like McDonald’s, which recently conducted its Dollar Menu promotion.

The Bottom-line
McDonald’s has been the top fast food giant, outperforming all other quick service chains. However, the recent economic dullness and difficult business conditions, falling consumer confidence, and increased competition have led to a drop in figures. But McDonald’s is not the only player caught in such difficulty, the restaurant industry is hit by falling consumer traffic. For February, the company again issued a warning that sales are expected to fall 3% compared to prior year. Despite the challenges in the short run, Chief Executive Don Thompson is confident and believes that the ‘unwavering commitment to delivering an exceptional restaurant experience' will help McDonald's drive numbers in the future and enhance the long term perspective of the company. 


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