Monday, 21 October 2013

Framing McDonald’s performance through Three Lenses by Don Thompson

“Business continues to grow, as demonstrated by third quarter performance. While global comparable sales of 0.9% were not as high as we’d like, operating income grew 6% in constant currencies and earnings per share was $1.52, a 7% increase in constant currencies” Don Thompson, President and Chief Executive Officer.

Looking at the Business across the Globe


Comparable sales were up 0.7% for the quarter, and operating income increased 5%. We accelerated the timing of our Monopoly promotion in an effort to further increase awareness and encourage trial of recent new product introductions like Quarter Pounder line sandwiches and the new McWraps. Monopoly also reminds customers about our core menu classics. It drives traffic and builds average check while also engaging customers in a fun and familiar game experience that’s only available at McDonald’s.

We also introduced Mighty Wings in the third quarter as a limited time offer. This bold new flavor addition to our U.S. menu originated in China and Hong Kong and has encouraged trade up to increase average check. While overall performance of Monopoly and Mighty Wings met our internal targets, it was not strong enough to offset current guest count trends.

Our promotions and new products are complemented by our consistent value approach to offer affordable variety and choice across the menu. The Dollar Menu remains core to our high-low strategy, with products like the Grilled Onion Cheddar Burger and the popular McChicken are continuing to generate strong demand at the $1 price point.

As we celebrate the 10-year anniversary of the Dollar Menu, we’re leveraging the equity we’ve built to ensure we continue to satisfy our customers’ expectations for affordability. The new Dollar Menu and More platform is designed to provide every day, predictable value beyond the $1 price point and will be supported with the weight of our national advertising. The sandwich lineup which ranges from $1 to $2 adds new flavors and tastes to complement our existing favorites and provide additional pricing flexibility for the McDouble.


Europe, where comparable sales were up 20 basis points for the quarter and operating income grew 8% in constant currencies. These results reflect strong performance in the U.K. and Russia and solid performance in France. Negative trends in Germany continue amid the highly competitive environment.


The U.K.’s business momentum remains strong, and we continue to grow market share. This growth has been supported by our expanded beverage lineup and an ongoing breakfast focus. This month, we’re launching Mocha in the U.K. and using this opportunity to introduce the McCafe brand across our entire range of espresso-based coffees. Following the successful launch of McCafe iced smoothies and frappes over the summer, this represents a significant step in our journey to become a beverage destination in the U.K.


Russia delivered positive performance in the third quarter despite the lower inflationary environment that continues to limit our ability to take price. Successful food offers such as tastes of the season and the Ciabatta Beef Burger helped boost results for the quarter.


France also delivered positive results for the quarter, marking its first positive quarter of comparable sales since the third quarter of 2012. The market continues to grow share in contracting industry. A core menu focus, supported by strong marketing execution and an ongoing emphasis on affordability helped to drive our performance.


Germany’s performance remains weak, as negative comparable sales and traffic trends continued through the third quarter. Competitive activity remains aggressive, and a decline in the IEO category persist as the industry grapples with price-sensitive consumers. Today, affordability, and specifically price value, is key in Germany. We continue to evolve the balance between our base value and premium offers across the menu to address the near term needs of the marketplace.

Asia Pacific, the Middle East, and Africa, or APMEA:

Comparable sales were down 1.4% for the quarter, and operating income decreased 4% in constant currencies. Performance across our big three markets remains challenging, this reflects tough macroeconomic conditions along with the performance of recent new products and promotions that were unable to overcome our current negative guest count momentum.

Across APMEA, we remain focused on driving performance through consistent price value offers, accelerating growth of key day parts, particularly breakfast and overnight, and by leveraging brand extension to enhance the service and convenience of the McDonald’s experience.

Australia continues to balance new product news and strong promotional activity to appeal to customers in a highly competitive environment. Looking ahead, Australia is targeting opportunities in chicken and the family business to broaden customer appeal.

Japan’s negative comparable sales and traffic trends persist. We’re committed to making improvements to our value platform in the near term in an effort to appeal to consumers who remain extremely price sensitive in this deflationary environment. At the same time, we’re introducing new products and promotions to create excitement and attract customers into our restaurants.

In China, comparable sales were down 3.2% for the quarter. As a key emerging market, China has significant long term opportunities across all three of our growth priorities. We’re also evolving our value platform to give it greater reach across day parts and meal occasions. At the same time, we’re using limited time offers and promotions to create energy around new menu news. And, we’re leveraging brand extensions like kiosks and McCafes to reach our customers when, where, and how they want the McDonald’s experience the most.

Expectations for the remainder of this year:

On the first quarter call in April, I said that we expected company operated margins to be pressured throughout 2013, though the margin decline should be less pronounced than in the first quarter, as sales comparisons ease in upcoming quarters.

Though sales comparisons have eased and will continue to do so, our current sales trends are a stronger predictor of future performance than prior year comparisons. As a result, based on what we know today, we expect fourth quarter global comparable sales performance to be in line with recent quarterly trends and restaurant margin percentage declines, both McOpCo and franchised, to be at a level relatively similar to first quarter declines.

We’re wrapping up our planning cycle over the next few weeks, and we look forward to sharing some of our 2014 outlook with you at our November investor meeting next month

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