GuruFocus Premium Membership

Serving Intelligent Investors since 2004. Only 96 cents a day.

Free Trial

Free 7-day Trial
All Articles and Columns »

Will McDonald’s Be Able to Sustain in Such a Competitive Environment?

April 23, 2014 | About:
Suravi Thacker

Suravi Thacker

1 followers

The breakfast industry is doing quite well in the U.S. and registered sales of $31.7 billion in 2012. This lured a large number of companies to enter the breakfast segment in order to take advantage of growing demand. McDonald’s (MCD) led this segment with a share of around $10 billion in 2012. However, growing competition has affected McDonald’s position in recent months. This was evident in the retailer’s first quarter results which failed to please investors.

Snapshot of the Quarter

Due to severe weather conditions and weakness in consumer confidence, the retailer missed on revenue expectations. Although sales grew 1.4% to $6.7 billion, over last year, it failed to meet the expectation of $6.72 billion. Same store sales inched up by 0.5%, mainly because of higher transaction size and higher sales in Europe.

However, the retailer witnessed lower store traffic, especially in the U.S. In fact, same store sales in the U.S. dropped 1.7%, hampering the top line of the company. Nonetheless, the company is making efforts to increase sales in other international markets such as Europe, Asia, China and Africa. Same store sales in Europe, which make 35% of McDonald’s total revenue, rose 1.4% during the quarter.

The food retailer was hit hard on the bottom line because of higher costs. Its earnings dropped to $1.21 per share from $1.26 per share, a year ago. Higher beef prices led to increased input costs, which weighed on its profits.

Competition in the Breakfast Segment

McDonald’s breakfast segment makes 25% of its total revenue. However, due to the increased attractiveness of this segment, host of players started offering new breakfast items, resulting in loss of sales for McDonald’s.

For example, Taco Bell’s new Waffle Taco, introduced last month, pleased customers. This attracted customers in hordes, as people shifted from other breakfast providers to Taco Bell. However, McDonald’s resorted to higher promotions to win back lost customers. It provided McCafe coffee for free till the second week of April.

Also, McDonald’s plans to extend its breakfast hours, which is currently till 10:30 a.m. This move is again because of Taco Bell’s breakfast time which is till 11:00 a.m.

Moreover, McDonald’s has ramped up its marketing efforts in order to entice customers. The effects of such efforts are expected to bear fruit in the coming months.

Summary

Breakfast is quite popular in the U.S., mainly because it is cheaper than the regular meals and hence it is pocket-friendly for cost-constrained customers. Also, according to NPD group, morning restaurant traffic for 2013 grew by 3% in the U.S., over 2012. This highlights the growing importance of this segment, especially in the U.S.

McDonald’s once enjoyed a lion’s share of the breakfast segment. But lack of innovation enabled other players to snatch away its market share. Although the company is making efforts such as stepping up marketing and giving away products for free, it fails to attract customers through its menu of offerings. Also, higher input costs and a weak quarter added to its problems. Therefore, it is prudent to stay away from this retailer.


Rating: 1.7/5 (3 votes)

Voters:

Comments

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK