McDonald’s Updates: Negative October Comps, Focus On Value Meals

McDonald’s Corporation (NYSE:MCD) posted a 1.8% decline in same-store sales for October. This was the first time since 2003 that McDonald’s has posted negative comparable sales, but the news was hardly surprising since the company had already mentioned during its earnings call that the October comparable sales were trending negative.

Comparable sales growth is an important measure to gauge a restaurant’s performance since it only includes the restaurants open for more than a year and excludes the effect of currency fluctuation. We look at some of the tactical and strategic changes implemented by the world’s biggest fast food chain to combat slowing comparable sales.

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Not An Easy Environment

While generating top-line growth remains a challenge, the company surely isn’t facing any respite on the expenses front. The fast food giant expects commodity costs to rise 3.5% to 4.5% in the U.S. and 2.5% to 3.5% in Europe. Labor costs, at least in the U.S., will be high in 2012 after the enactment of the 2011 HIRE Act payroll tax credit. With the global economy in a precarious state and the consumer confidence weak, implementing price hikes becomes all the more challenging. Raising the prices could have a detrimental effect as consumers generally tend to display a high negative elasticity during tough economic times.

McDonald’s, as it has in the past, is relying on a combination of new product introductions and offering value meals to entice customers to its restaurants. Extending hours at its restaurants and offering breakfast options during the wee hours of the day to increase the guest traffic also remain a priority.

So What Next?

The big addition to McDonald’s menu has been the Cheddar Bacon Onion sandwich. The company will also reintroduce its mackerel sandwich and the McRib shortly. In terms of offering options for the more price sensitive customers, a greater focus on Dollar menu will help bring in additional guests. The company had shifted its focus from Dollar meals to Extra Value meals due to higher margins associated with the latter. But, given the overall weakness in consumer confidence levels, the move did not really go down well with the customers. So, the focus has again shifted to Dollar menu meals with items such as McDouble being offered for $1 since mid-September. Restaurants across the country will also continue to offer soft drinks and premium roast coffee for $1.

Similarly, in Japan, the company has a 100 Yen menu as part of its value offerings. In Australia too, McDonald’s has been trying to increase its guest count through the Loose Change menu and the addition of more premium items such as the Serious Lamb Burger and the Serious Lamb Taster Wrap. In France, Petit Plaisir, the smaller sandwiches priced at 2 euros, will be extended nationwide.

But the company has admitted that there is usually a lag of two to three months between when the actions are implemented and the corresponding results start getting reflected. Thus, the next couple of months might still remain weak but a continued weakness beyond the stipulated time-frame would imply that the restaurant chain is not dynamic enough to adapt to changing consumer demands and increasing competition. This could lead to downside to our current price estimate.

We have a $94.5 price estimate for McDonald’s, which is about 10% higher than the current market price.

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