News
McDonald's wins with beverages, pushes re-imaging
April 21, 2010
McDonald's beverage program is proving a sales driver for the brand, even as consumers remain focused on value, executives told investors on the company's first quarter earnings call. The company will still promote value worldwide as it continues to push forward with its Plan to Win strategy, including an aggressive re-imaging program.
In the United States, March was the strongest month for the quarter ending March 31, boosted by beverage and value menu purchases, especially at breakfast, as well as increased traffic across all dayparts. McDonald's breakfast value menu led to a decreased average check, but increased traffic more than made up for the difference, said McDonald's president and COO Don Thompson.
Thompson also said the company's beverage program provided a sales lift as Premium Roast Coffee and the McCafé espresso-based drinks continue to grow. Additionally, McDonald's is gradually rolling out its new frappes and smoothies nationwide. The frappes are in about 90 percent of U.S. stores, and smoothies are expected to launch nationally later this summer.
Jim Skinner, McDonald's Corp. CEO, said on the call that the company's new frappes and smoothies are outperforming expectations even without national advertising.
Focus on value
Value is still important to consumers, and the breakfast value menu has "reinvigorated this vital daypart," Skinner said. The company has noted some improvement in consumer confidence scores and a slight increase in spending, but unemployment is still relatively high at 9.7 percent and continues to impact spending overall.
"I think that's going to continue to be an issue, and I believe that the results that we are achieving are a result of our strategies around the value orientation of our menu," Skinner said on the call. "It is absolutely continuing to be the most important thing relative to our customers, and that is everyday affordability. And yet of course we continue to grow guest counts during this very difficult time, and have opportunity for them to partake of value across the menu even in our premium sandwiches. So, I think it's as much our strategies as it is the confidence of the QSR consumer."
Comps results
McDonald's global comparable sales were up 4.2 percent, with the United States up 1.5 percent, Europe up 5.2 percent and Asia/Pacific, Middle East and Africa up 5.7 percent for the quarter.
The U.S. business also drove sales and market share increases during the quarter by providing outstanding value across the entire menu, contributing to the segment's 12 percent operating income increase.
Performance in France, Russia and the United Kingdom drove Europe's operating income up 23 percent (14 percent in constant currencies). Across the segment, McDonald's continued to outperform the informal eating out market and gain market share. Europe's themed food events, three- and four-price tier menus, restaurant reimaging and daypart expansion fueled the segment's strong performance.
Asia/Pacific, Middle East and Africa's (APMEA) ongoing commitment to compelling, everyday value, locally-relevant products and emphasis on operations excellence drove positive comparable sales in nearly all markets. APMEA's operating income increased 27 percent (9 percent in constant currencies), led by results in Australia and China.
Re-imaging investment
McDonald's is continuing its investment in re-imaging worldwide with plans to freshen more than 2,000 locations worldwide this year, including 400 to 500 in the United States. About 1/3 of U.S. stores have gone through re-imaging, and this effort includes interior and exterior renovations. Worldwide, only about 20 percent of stores' exteriors reflect the brand's current contemporary look. The company expects to invest $150,000 to $200,000 per restaurant, depending on the scope or the remodel, and owner/operators will contribute the remaining $250,000 to $500,000. (Click here for a slideshow of a McDonald's re-imaged store.)
Thompson said the investment is averaging higher with this re-imaging program because a number of owner/operators are electing to include other capital improvements, such as replacing HVAC units or repaving parking lots, along with the scheduled remodel.
McDonald's expects a strong return on investment from the reimaging program, especially at stores with exterior re-imaging. In China, re-imaged stores have led to improved brand perception as well as higher sales. In Australia, re-imaged stores have seen a three-year incremental ROI of 60 percent or more, Skinner said. In the United States, the first re–imaged sites will be older, higher volume locations.
Pete Bensen, McDonald's chief financial officer, said re-imaged stores see an average sales lift above overall market performance of at least 6 percent to 7 percent. "So, we expect returns from re–imaging to be good for both the company and our owner operators." The contemporary look also supports the company's focus on premium offerings.
During the call, analysts asked Skinner for a preview of the expected impact from healthcare reform. He said the company has yet to determine the direct impact on the company, but it expects franchisees to be impacted $10,000 to $30,000 per store. Yum! Brands CEO David Novak reported a similar figure during the company's earnings call earlier this month.
Skinner did say the company expects to benefit from the 90-day waiting period, which is nornally how long it takes to determine whether an employee is going to become full time.
Financial results
Total revenues were up 10 percent at $5.6 billion, compared to 5.07 billion in the same period last year.
Net income was up 11 percent at $1.1 billion, compared to $ 979.5 million in the same period last year.
"Our plan to win is delivering significant sustainable success," Skinner said. "These latest results mark our 27th consecutive quarter of comparable sales growth. As I have experienced at this week's McDonald's Worldwide Owner/Operator Convention, our alignment and plans to deliver a great experience for our customers well into the future is strong and clear. With our entire system aligned and focused, I'm confident that we'll continue to satisfy and delight our 60 million customers every day and I'm confident that our best is still yet to come for our system and our shareholders."
An archived webcast and podcast of the company's conference call will be available for a limited time on the company's website.
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