Technology, value emerge as McDonald's priorities in tight market

McDonald's reported its Q3 earnings last week, including flat global comp sales attributed to consumer pressures, company investments and heightened competitive activity.

The performance marked the slowest quarter for the Golden Arches in nine years.

CEO Don Thompson said the company is making "tactical adjustments" to better compete in the "new normal" environment of slowing consumer sentiment, higher commodity and labor costs and added competition.

Those adjustments will continue to fit McDonald's three global growth priorities: optimizing the menu, modernizing the customer experience and broadening accessibility.

U.S. performance

Comp sales in the U.S. were up 1.2 percent for Q3, driven by breakfast and beverages, a focus on the core menu and support for value options.

"The informal eating out industry is predicted to be flat in 2013. And the competitive set has increased its activity, pressuring our share in recent months," Thompson said. "The U.S. (McDonald's system) has taken steps to address the changing needs of our customers."

One strategy is to support value offers with strong advertising. Additional support will continue to roll out for McDonald's dollar menu platform.

"We are continuing to invest in driving traffic by promoting and emphasizing value across most of our markets. Although initially this negatively impacts both revenue and margins, strong entry level value offerings bring incremental customers into our restaurants," said Peter Bensen, chief financial officer.

The company is balancing the value messaging with premium menu news, including the recent introduction of its Cheddar Bacon Onion sandwich. The "CBO" was inspired by a similar offering in Europe and includes the choice of chicken or Angus beef.


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To close out the fourth quarter, the CBO will be followed by the popular McRib, which Thompson expects will help stimulate the brand's momentum. He also said that 2013 will feature a stronger new menu presence than McDonald's had in 2012.

"I'm confident that our focus on strengthening our value messaging and delivering more premium food and beverage offerings will enable us to appeal to some more customers more often," Thompson said.

Thompson pointed to a similar value strategy put into place Australia that seems to be working thus far.

"We thought we needed to have stronger value as we saw the economy soften. They put in the Loose Change menu and we saw a very solid turnaround of guest counts and our guest counts are now quite strong," he said. "Australia has been trending in a very positive direction."

Service/technology/reimaging initiatives

In addition to balancing value with premium messaging, McDonald's will also continue to extend operating hours and improve operations and customer satisfaction scores.

Service initiatives include adding dual-lane drive-thrus, handheld order takers and restaurant reimaging. Bensen said remodeled units have been experiencing a 6 to 7 percent average lift in same-store sales.

"Reimaging is a key differentiator for our brand. Investments can enhance the capacity, efficiency and overall operations of our restaurants. A newly remodeled restaurant energizes our crew. Through the first nine months, we have completed 1,463 reimages globally and remain on pace to hit our target of over 2,400 for the year," he said.

Globally, a little more than one-third of exteriors have been updated in the system, and about half of interiors. In the U.S., about 30 percent of interiors and exteriors are in the new image.

McDonald's is also upgrading its point-of-sale technology, which has reduced ordering time and increased capacity.

"Relative to other consumer-related benefits with our new technology systems, we are looking at and testing in certain markets around the world, everything from e-couponing to mobile order and pay to a bit of what I call a customer recovery/retention type of relationship that we build with those who have a smartphone," Thompson said.

Thompson also provided an update of McDonald's kiosk deployment made last year throughout Europe.

"We're looking at how (kiosks) will apply globally. Kiosks are one option (to gain customer loyalty) but the other option is how much we use mobile phone technologies or smartphone technologies because of apps and mobile ordering," Thompson said. "We have a couple of markets that are almost fully implemented with kiosks."

European/APMEA performance

Third quarter sales in Europe were up 1.8 percent and McDonald's has grown share in the market despite an unsteady economic environment. The company has emphasized a two-pronged approach that includes more media exposure and a focus on value offerings, while also promoting new items. Sales in Russia and the U.K. have especially lifted the company's performance.

New food news includes the M food event, a premium M burger and the Chicken Legend with Bacon. In Russia, McDonald's is focused on beef and chicken sandwiches. In France, the emphasis has been on Petit Plaisir – smaller sandwiches – and the Petit free value menu that includes the Royale Barbecue.

In Asia/Pacific, Middle East and Africa, comp sales were up 1.4 percent.

"China continues to be a market with significant potential. Third quarter comparable sales increased 3.6 percent on top of 11.3 percent last year," Thompson said. "We're delivering double-digit comparable sales growth at breakfast. With established value platforms to drive traffic at breakfast, lunch and dinner, China is focused on building average check."

The market also features new products such as bubble tea and the black and white sandwiches. McDonald's is on track to open 225 to 250 new restaurants in China this year, and to have 2,000 outlets there by the end of 2013.

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