When consumer spending is low, it is generally the lower income group people who suffer. They cut back on their spending, which results in lower sales in the retail sector. Moreover, there are some companies that mainly cater to such demographics only. Hence, a small drop in consumer spending results in huge losses. Consumer spending in the U.S. dropped 0.1% in July. This definitely brought adverse effects on retailers.
One such example is McDonald's (MCD, Financial), a fast food restaurant chain that witnessed lower demand during the third quarter. This was reflected in its results which were mixed. Although earnings beat the analysts' expectations, revenue was quite below the estimates. Shares fell after the announcement.
Digging into the details
Revenue dropped a drastic 5% to $6.99 billion, over last year's quarter. Analysts were looking at a top line of $7.23 billion. Factors which affected the top line were lower customer traffic in stores and competitive pressures from other players in the industry. Hence, same store sales plunged 3.3% as fewer people visited the existing stores.
Along with restrained spending of consumers, there were food safety issues which kept customers away from McDonald's. One of the Chinese suppliers of the company was found using expired meat, which scared customers away from having chicken items at McDonald's. Therefore, sales in Asia slipped 9.9% during the quarter.
Although the top line was not up to the mark, the company did put up a decent bottom line. Adjusted earnings stood at $1.51 per share, significantly higher than the analysts' estimate of $1.37 per share. Thus, the fast food chain managed its costs efficiently, despite all the headwinds.
Further insights
Another problem faced by the food retailer is a shift in taste of customers to higher quality foods. People have become health conscious. Therefore, they prefer having natural and organic food which is good for health and avoid having fast food at Mc Donald's.
It also faces stiff competition from companies such as Chipotle Mexican Grill (CMG, Financial), which claim to offer high quality fast food to its customers. In fact, the company reported a jump of 19.8% in its same store sales, which is commendable.
Some efforts for the future
In order to overcome the issues of food safety and quality, McDonald's plans to change its marketing strategy. Its promotions will now inform customers about the quality of its food so that people start believing in it. It has also started with an online marketing campaign which shows that McDonald's factories are safe and hygienic.
Also, it plans to make its menu simpler and showcase only relevant and core items. It has even expanded its breakfast menu since there is a lot of demand for quick breakfast items which are easy to have on the go.
Moreover, McDonald's has created a platform, called "Create Your Taste," that helps customers customize their sandwiches as per their tastes and preferences. This program will be launched in most of the regions in the coming months.
Final words
The fast food chain is making the right moves to attract more customers and increase its reliability. Although the food safety scandal and some other issues affected its top line, its undertaken measures will help in overcoming it. A more simple menu and ramped-up marketing will help the company boost its sales. Thus, investing in this company is not a bad idea.
