Published October 19, 2012
McDonald's Corp posted its worst quarterly restaurant sales growth performance in nine years on Friday, lifting the curtain on the fast-food industry's ruthless fight for customers in a weak economy.
The world's biggest fast-food chain is battling more than the bleak global economy that is curbing appetites for purchases of its hamburgers, salads and smoothies. Resurgent chains like Burger King Worldwide Inc and Yum Brand Inc's Taco Bell now are challenging McDonald's in the United States with revamped menus, celebrity endorsers and a renewed focus on low-priced food.
McDonald's domestic market falls just behind Europe as the company's top region for sales.
Easing food cost inflation has allowed U.S. restaurants to step up their menu price wars. "It's led to a very cutthroat restaurant environment," Morningstar analyst R.J. Hottovy said.
"You have a scenario where the overall pie is shrinking, and companies are competing aggressively to take their piece of it," Bernstein Research analyst Sara Senatore said.
When asked to explain why the third quarter's results lagged even those put up during the height of the financial crisis, McDonald's Chief Executive Officer Don Thompson attributed the results to the tougher battle for stomachs and economic challenges in each of the company's major regions.
That confluence of factors forced McDonald's to miss Wall Street's earnings estimates for the second quarter in a row. It also warned that sales at established restaurants - a closely watched gauge of restaurant performance - are down so far this month.
"When the economic crisis began in 2008, few people thought the environment would still be as uncertain and fragile as it is today," Thompson said.
"It is clear, however, that this operating environment is the new normal," said the CEO, who added that the company's marketshare is flat or up in all major markets.
McDonald's is not alone in its woes.
Chipotle Mexican Grill Inc on Thursday forecast a slowdown in same-restaurant sales growth for 2013. The popular burrito chain also said it wasn't losing customers to competitors like Taco Bell, but investors saw its guidance as a signal that Chipotle's days of torrid growth may be over.
The setbacks reported by the two top industry performers sent sector shares lower on Friday. McDonald's stock fell 4.5 percent to close at $88.72, Chipotle tumbled 15 percent to $243 and Yum slipped 2.8 percent to $70.09. McDonald's and Chipotle get significant business from the United States, while China is Yum's primary market.
Third-quarter net income at McDonald's fell 3.5 percent to $1.46 billion, or $1.43 per share, from $1.51 billion, or $1.45 per share, a year earlier. It missed analysts' average estimate by 4 cents, according to Thomson Reuters I/B/E/S. Total sales slipped 0.2 percent to $7.15 billion.
The impact of a stronger dollar, which decreases the value of sales overseas for U.S. companies, trimmed earnings by 8 cents per share.
McDonald's global sales at restaurants open at least 13 months rose 1.9 percent, the first gain of less than 2 percent since the second quarter of 2003.
That result just missed the 2 percent increase that analysts polled by Consensus Metrix had expected because of shortfalls in the United States and the Asia/Pacific, Middle East and Africa (APMEA) region.
Expectations were muted for Europe, where government belt-tightening has hurt demand. Still, results topped estimates after the company's emphasis on value-priced meals like the McDeal extra value meal helped offset a drop in traffic.
Analysts said McDonald's will use its size and business acumen to keep its edge over rivals.
"This chain will just have to grind through this. We're confident they can do this with their brand power and their advertising budget," Edward Jones analyst Jack Russo said.
Analysts expect other restaurant operators to lower expectations for this quarter and the next.
They say same-restaurant sales gains will be hard to come by because results from last year got a bump from unseasonably warm weather that freed up cash that otherwise would have gone to pay heating bills. It also will be difficult to offset food costs with menu price increases because traffic is already weak.
"It's not getting easier out there," Lazard Capital Markets analyst Matthew DiFrisco said.
(Reporting by Lisa Baertlein; Additional reporting by Brad Dorfman in Chicago; Editing by Gerald E. McCormick, Dale Hudson, Jeffrey Benkoe, Jan Paschal and Tim Dobbyn)