Article

McDonald's focus on core items, reimaging and labor pays off

As leadership transition takes place, company remains disciplined about menu enhancements, customer experience.

April 23, 2012 by Alicia Kelso — Editor, QSRWeb.com

McDonald's Corp.'s first quarter global comps were up across the board, as the company reported higher revenue, operating income and earnings per share versus last year.

During Friday's earnings call – Jim Skinner's last as CEO before retiring June 30 - included the following highlights:

• Global comparable sales increased 7.3 percent, and benefited from one additional day due to leap year;
• Consolidated revenues increased 7 percent (8 percent in constant currencies);
• Consolidated operating income increased 8 percent (9 percent in constant currencies); and
• Diluted earnings per share of $1.23, up 7 percent (8 percent in constant currencies).

"McDonald's continued momentum in first quarter drove market share gains and profitability across all geographic segments," Skinner said. "The ongoing strength of McDonald's results, amidst persistent economic headwinds, is a testament to our customer-focused plans and our proven business model."

Change in leadership

Skinner's presence during this earnings call was minimal, while COO and president Donald Thompson, who will take over as CEO July 1, assured investors not much will change under his leadership, and that he'll stick to the Plan to Win strategy that was put into place in 2003 and has yielded much success.

"I was here on the front end of when we did the Plan to Win, and I understand what it means to our organization. We remained focused on people, product, place, price, promotion," Thompson said. Some of the initiatives he discussed were:

• "When we talk about modernizing the customer experience, technology will play a major role;
• When we talk about optimizing the menu, we will be more focused, as we have been, on nutritional-based products, but also focusing on our core and some premium products that we see coming out of areas like Europe;
• We will scale products and learn from the various areas of the world at a more accelerated pace;
• We can deliver organic growth and build new restaurants – we're doing it across APMEA and across many of our major markets and will continue to do that."

U.S. segment

McDonald's U.S. generated comparable sales of 8.9 percent driven by a focus on core items such as the Big Mac, new offerings such as Chicken McBites, reimaged restaurants, technology and labor investments and favorable weather. Operating income for the quarter rose 10 percent.

"We often say that the power of our system lies in our ability to learn from each other, then share, then scale ideas, and McBites is a great example of that. The product originated in Australia, and its positioning as a promotional food came out of Europe," Thompson said.

McDonald's U.S. also experienced an increase of 6 percent in total beverage units from last year. In the next few weeks, McDonald's will add a Cherry Berry Chiller, made with 100-percent juice, to the McCafe blended ice lineup.

The U.S. system also broadened accessibility to its value proposition during the quarter, introducing the new Extra Value Menu, which builds on the Dollar Menu by offering products at various price points. Thompson said this new menu fits within an overall price strategy moving forward.

"What we've looked to do is have some opportunity to bring some products down to a lower level price, i.e. the 20-piece McNugget, which are really compelling to customers. But at the same time, we also know this will highlight products like Snack Wraps, which are accretive to building the margin," he said.

Technology and labor productivity also played a big role in the system's success during the quarter. More than one-third of all restaurants now feature multiple order points, including tandem or side-by-side drive-thrus, along with nearly 1,200 handheld order takers. McDonald's also has a new register system and point-of-sale system.

"The new POS also enables things like the handheld order taker, which gets more orders back into the kitchen during peak hours. Adding some additional labor, that's where we see a little impact. Net-net, to grow, we grew comp transactions 5 percent during that lunch hour in the first quarter, so those investments are definitely paying off," said CFO Peter J. Bensen.

Finally, with the reimaging program, McDonald's U.S. has "tremendous acceleration," with around 800 done thus far. Sales at those units are up about 6 percent, Thompson said. Reimaged restaurants that have been open more than 12 months are in the 6 to 7 percent range, highlighting the long-term investment benefits of the program, Bensen added.

Europe

Europe delivered comparable sales growth of 5.0 percent and operating income growth of 4 percent (8 percent in constant currencies) for the quarter. Performance in the UK and Russia led the segment's sales growth, with France and Germany also contributing. Europe's emphasis on affordability, premium product innovation and restaurant reimaging continued to drive the segment's results. Ongoing economic challenges and severe weather in February negatively impacted the quarter.

Europe had a busy quarter of limited-time offer launches, including two premium beef sandwiches in France – the McFarmer and McTimber. In the UK, promotions around the Big Tasty beef sandwich and the 20-piece McNuggets ShareBox exceeded expectations, according to Thompson, as did Germany's 1955 Burger.

With Europe's ongoing debt crisis and lingering 10 percent unemployment rate, McDonald's has stepped up its emphasis on branded affordability. Europe also continues to lead the company's reimaging efforts, with 80 percent of interiors and 50 percent of exteriors completed.

"We continue to broaden our accessibility through the rollout of the new point-of-sale system and the expansion of McCafes. Approximately 150 more will be added this year," Thompson said. "Our holistic approach to the business and attention to the evolving customer needs serves us well in these times of economic uncertainty."

APMEA

Asia/Pacific, Middle East and Africa's (APMEA) comparable sales increase of 5.5 percent reflected broad-based growth led by China, Australia and Japan. APMEA's operating income rose 10 percent (7 percent in constant currencies) as execution of the segment's core menu, value and convenience strategies drove results.

McDonald's will launch a value dinner program in China in the coming months.

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