It’s not just Yum! Brands (YUM, Financial) that’s going through a rough patch, as understood from its recent earning release. After the parent company of KFC, Pizza Hut and Taco Bell, reported poor set of numbers, America’s most popular burger chain, McDonald’s (MCD, Financial) came out with figures that failed to impress investors. The company is encountering an even worse phase in its history. After all, what could be more serious than a year-long sluggish sales in its home market? That’s right. With the disappointing third quarter 2014 numbers, McDonald’s reported its straight 12th quarter of declining sales. Let’s take a quick look at the quarter’s numbers and try to pin point at things that are going wrong for the Big Mac maker, and how the company plans to resolve the issues.
A look at the numbers
McDonald’s has had a good run for decades. But now it seems that the American population is not favoring the burger giant anymore. On the back of declining demand and customers migrating to healthier fast food options, the company reported a drop of 3.3% in worldwide sales over last year, missing analyst estimates. The bottom line also took a good hit as profits dropped by 30% at $1.07 billion, translating into earning of $1.09 a share, compared to last year’s $1.52 a share.
McDonald’s President and CEO, Don Thompson, mentioned during the earnings call that “we are disappointed by our recent performance which fell short of our expectations. Global comparable sales decreased 3.3% for the quarter, operating income was down 14% in constant currencies and earnings per share was $1.09, a 28% decrease in constant currencies.”
Speaking globally, the situation in China was highly sad as sales dropped 23% due to the food scare that also negatively impacted KFC. In Europe, sales were down by 4% as more than 450 outlets in the geography are being investigated for food safety measures and quality check points. However, the worst symptoms of a darker future came from McDonald’s home market, the U.S. – a market that accounts for about 40% of its global restaurants.
Surely a few factors weren’t much in the company’s hands, such as the significantly higher tax rate as a result of the increased tax reserves in some foreign markets, that impacted EPS by $0.26. Then, the food scare in China related to the supplier issue brought down the EPS figure by another $0.15. Finally, problems in Europe pushed down the EPS by another $0.01.
What’s going wrong?
To put it simply, consumers are losing their trust on the brand and are questioning how healthy the components are that are going into their food. Triggered by the latest food scare in China when one of its meat suppliers were caught while supplying meat that has passed its expiry date, the company is facing mistrust issues. McDonald’s was very prompt in cutting its terms with the supplier, but such corrective measures aren’t enough for the consumers. Consumers are looking for preventive measures.
Consumers are asking questions such as “Have you ever used pink slime in your burgers?” and “Does McDonald’s beef contain worms?” Analysts and industry experts believe these questions are resulting from the deep mistrust against the brand. American consumers are growing health conscious and are opting for healthier fast food options such as Chipotle Mexican Grill (CMG, Financial) and are willing to pay a premium for quality product. As pointed out by a report in The Guardian, “Younger diners are deserting the restaurant in droves to eat out at rivals such as Chipotle Mexican Grill – which, just the day before McDonald’s revealed its horrible sales figures, announced 20% growth in revenues. The number of 19-to-21-year-olds visiting McDonald’s once a month has fallen by 13% since 2011, according to food analysts Technomic, while the number of 22-to-37-year-olds visiting has not grown.”
McDonald’s trying to imitate Chipotle
There’s a very famous saying – Imitation is the highest form of flattery. Well that’s exactly what McDonald’s is attempting to do. The burger giant is trying to adopt the ways in which Chipotle is succeeding. McDonald’s is up on its toes to fix the issues and change consumer perception, and considers adjusting misperceptions about the freshness, quality and integrity of our ingredients and integral part of this strategy.
According to Don, “We have listened to our customers and we’ve listened to our customers around the world and better understand what their future experience should look like. Customers want to personalize their meals with locally relevant ingredients. They also want to enjoy eating in a contemporary inviting atmosphere. And they want choices; choices in how they order, choices in what they order and how they’re served.”
The company plans to offer high amount of customizability through which the consumers can make their own burgers. McDonald’s calls this “Create Your Taste”. While this is a novel concept for the Big Mac, the concept has been pioneered by Chipotle. The burrito maker has experienced overwhelming success because of its concept of “Food with Integrity”. In fact, when MCD and YUM are posting sluggish numbers, Chipotle’s third quarter comparable sales surged by a whopping 19.8%.
Apart from this, McDonald’s is also working on enhancing customer experience inside the stores. The quick food lovers will have access to free Wi-Fi in most of the global outlets and apart from that will also be able to make purchases through Apple Pay. The payment option will be available even in the drive-throughs, something no other quick service restaurant provides. The company hopes these measures will help to reposition the brand in the mind of the consumers and thus pull it out of the dark controversies that are hampering its growth prospects.
