McDonald’s (NYSE:MCD) came out with its first quarter earnings on Tuesday. The fast food giant reported lower than expected profit as higher cost of beef and lower footfall in the domestic market ate into the margins.
It’s now been more than two years that McDonald’s sales haven’t really been a reason of smile to the company investors. The quick service restaurant chain has been long suffering from poor comparable store sales growth.
The slow-moving economy and increasing competition from fellow rivals Chipotle Mexican Grill (NYSE:CMG), Yum! Brands (NYSE:YUM), Burger King (BKW), and Starbucks (NASDAQ:SBUX) are eating into the company’s market share. This isn’t all; the Oak Brook-based company has also taken some missteps leading to its stagnant growth. Its menu in the recent past has failed to attract masses, as the changes in menu somehow didn’t please consumer taste buds.
Numbers in a Snapshot
McDonald’s revenue grew 1.4% to $6.7 billion during the quarter. But expenses rose at a faster pace of 2.3%, which had an impact on the profit of the company. Net income for the period plunged 5% to $1.2 billion, against profit of $1.27 billion recorded in the last year comparable quarter.
Domestic restaurant sales dropped 1.7% during the period, which was worse than the consensus estimate of 21 analysts who expected the drop to be around 1.4%. This is the sixth subsequent quarter that recorded worse than expected fall in comparable store sales. Wall Street has cautioned investors that recovery might be very slow.
Worldwide comparable sales were in the green. It rose 0.5% backed by 1.4% growth in the European market and 0.8% rise in the Asia Pacific, the Middle East and Africa (APMEA) region. Same store sales growth of the Europe and APMEA beat Street estimates.
The current U.S. menu isn’t drawing much consumer attention. It’s high time for the burger giant to revise its menu such that it suits the palate of American customers. This clubbed with slow service is dampening the company’s sales and profit prospects. Slow service would have an impact on the ability of the company to handle higher footfall. This could well be a proper reason for many to customers who are currently not visiting McDonald’s outlet. Quick service is one of the key points to keep in mind for a fast food operator to stay profitable and competitive in the restaurant market.
McDonald’s CEO Don Thompson is under great stress. Improving the company’s overall earnings capability and sales growth has become quite imperative for Thompson as this is the second consecutive year of his term that McDonald’s is struggling. He said that same store sales should see a modest growth in April. But the current year’s profit is estimated to remain under stress as beef prices would continue to rise. Labor cost is also going to see a considerable jump this year. This along with intensifying competition from other players could have a bearing on the margins of the company.
Other than changing industry dynamics, McDonald’s blamed extreme winters to be one of the prime reasons that dampened its profits. As competition is intensifying (we saw that when Taco Bell introduced breakfast menu to intrude into McDonald’s space), McDonald’s need to add some sizzling items to its menu card instead of complicating it with unwanted offerings. Innovation has been one of the pain points of the American giant. Decent European sales helped lighten investor mood, but the burger giant has to pep up its core home market to regain its previous position.