McDonald's CEO: 'We expect remainder of 2013 to remain challenging'

July 21, 2013 | by Alicia Kelso

McDonald's reported its Q2 results earlier this morning, which included a global comp sales increase of 1 percent, driven by a 1 percent gain in the U.S.

Globally, the company didn't fare as well — Europe's comp sales dropped 0.1 percent as a result of negative results in Germany and France, while Asia/Pacific, Middle East and Africa (APMEA) declined 0.3 percent, with negative results in China, Australia and Japan. CEO Don Thompson remains optimistic about the company's direction, even in a "challenging IEO (informal eating out) environment."

"We know the things we've put into place are having some impact," he said. "Also, the products we've implemented — chicken, beef, breakfast and beverages — have met or exceeded their targeted performance levels."

During Q2, McDonald's rolled out offerings in each of those four focus categories, including the Chicken McWrap, three new Quarter Pounder burgers, the Egg White Delight and the Blueberry Pomegranate Smoothie.

"In the U.S., we continue to outpace the competitive set. We've gained about 10 basis points relative to traffic," Thompson added.

Also in the U.S., versus its QSR competition, McDonald's is well-positioned because of its Dollar Menu, according to Thompson.

"We're seeing a lot of price discounting rather than consistent value platforms, which we have around the globe and we're going to maintain that consistency because it's important to consumers," he said. "They look for consistency in terms of the value platform. It's about establishing loyalty versus being aggressive for one or two months."

McDonald's U.S. Dollar Menu represents 13 to 14 percent of sales.

Pricing challenges

Because of the challenging economic environment, McDonald's may have taken a slight hit during the quarter with its pricing strategy. The food-away-from-home inflation index in the U.S. was 2.2 percent, while the food-at-home index was up 0.9 percent. This, according to CFO Peter Benson, "somewhat limited our pricing power." At the end of June, McDonald's price increase was 1.5 percent, about 120 basis points less than last year.

"As we move through the second half of the year, we will consider future price increases balancing our desire to grow traffic and market share amidst the reality of higher input costs. In addition to pricing, we're employing more suggestive selling strategies at the order point to encourage trials, new products and add-on purchases," Benson said. "It's a market share battle so we're employing a variety of strategies and tactics to grow traffic and increase relevance to our consumers."

The year ahead

Thompson added that the remainder of 2013 will remain challenging based on numerous factors, including top and bottom line pressures.

"We know we're seeing ongoing global economic headwinds. We're seeing flatter declining high yield markets and ongoing competition chasing fewer guest counts as a result of a less and discretionary spending. We also know that this is a more price sensitive timeframe based on these economies and ongoing P&L pressures including higher labor and commodity costs," he said.

However, the company's targets, he said, are achievable and McDonald's will continue to focus on the four categories of breakfast, beverages, beef and chicken to close out the year. Executives also hinted at new product news in the fall.

"We have a pretty robust third and fourth quarter coming down the pike. Product is coming, but we can't get specific on it," said Tim Fenton, COO.

"We have a very solid menu pipeline which has helped us outperform the competition in mass ... Good pipelines, good value, good marketing campaigns, those things will continue," Thompson added.

McDonald's will also continue to invest in technology initiatives to engage its consumers, and will keep working on its reimaging program, anticipating nearly half of all restaurants to be updated within the next year.

International highlights

Some notes from McDonald's international business:

  • China continues to be plagued by the avian influenza outbreak, with comp sales down 6.1 percent during Q2. McDonald's will focus on beverages and the late night daypart in that market to continue its recovery.
  • The U.K. was buoyed by product news, particularly the blended ice beverage launch in June. "Inspired by the U.S., these new products expand the overall beverage lineup and further validate blended ice as a proven system solution that can be deployed across markets worldwide," Thompson said.
  • To fix negative sales and traffic trends in Germany, McDonald's is leveraging consumer insights more, while adjusting its plans based on this data.

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Topics: Food & Beverage , Marketing / Branding / Promotion , Operations Management , Trends / Statistics

Alicia Kelso / Alicia has been a professional journalist for 15 years. Her work with, and has been featured in publications around the world, including NPR, Good Morning America, Voice of Russia radio, and Franchise Asia magazine.
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