McDonald's August Sales Highlight Struggles in Key Markets

By RetailFOXBusiness

McDonald’s (NYSE:MCD) saw its monthly global sales post their worst decline in more than a decade, as the iconic hamburger chain continues to struggle in key markets.

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Sales at restaurants open at least 13 months were down 3.7% in August, McDonald’s reported on Tuesday. August marked the fourth consecutive month of declines for sales in the U.S. Restaurants in Asia and Europe also booked weak results.

With competition from fast-casual restaurants growing, McDonald’s has pledged to revamp its menu and resolve staffing issues at domestic locations. A tepid economic recovery in Europe has hampered sales there, while a supplier controversy in China damaged the company’s reputation in Asia.

McDonald’s has reported lower traffic in China after a supplier, Shanghai Husi Food, was accused of selling expired meat to restaurants. Shanghai Husi Food is owned by U.S.-based OSI Group. McDonald’s subsequently detailed plans to change its food-safety procedures in China, including more audits of its suppliers.

On Tuesday, the Oak Brook, Ill.-based company said lost sales and expenses tied to the issue will lower third-quarter earnings by 15 cents to 20 cents a share. McDonald’s operates more than 2,000 stores in China.

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Same-store sales in the Asia/Pacific, Middle East and Africa region tumbled 14.5% last month, mostly due to the supplier controversy that McDonald’s said is impacting sales in Japan as well. In July, McDonald’s comparable sales in the segment fell 7.3%.

“In both of those major countries, the consumers immediately reacted negatively. Now we can see that the issue persisted into August,” said Mark Kalinowski, a restaurant analyst at Janney Montgomery Scott.

But considering similar issues in the past, the health scare may not be a long-term headwind for McDonald’s sales in Asia. “Companies are usually able to overcome those challenges,” Kalinowski said.

Standard & Poor’s also expressed optimism. In a report issued on Tuesday, the credit rating firm said it expects McDonald’s worldwide sales performance to rebound in the coming months.

“As a system, we are diligently working to effectively navigate the current market conditions to regain momentum,” McDonald’s president and chief executive Don Thompson said in a statement.

In the U.S., McDonald’s and other fast-food chains have come under fire from an expanding group of rivals like Chipotle Mexican Grill (NYSE:CMG). Chick-fil-A has also become a bigger competitor to McDonald’s, according to Kalinowski.

Domestic same-store sales dropped 2.8% in August. McDonald’s cited “sluggish industry growth in a highly competitive marketplace.” As a result, the company said it will address its service and menu to boost customer loyalty.

“Limited time offerings are not resonating with customers,” Kalinowski said. “We’d like to see them simplify the menu. Part of McDonald’s challenges is the menu got too complicated. It leads to complexity in stores and slower service.”

Kalinowski further explained that McDonald’s needs to simplify its operations so restaurants can serve customers more quickly and increase throughput, thereby improving sales.

Strength in the U.K. helped McDonald’s stem declines in Europe, where sales ticked 0.7% lower. The company was unable to fully offset difficulties in Russia, where McDonald’s was forced to close some restaurants amid tensions between Russia and the U.S. over fighting in Ukraine.

Russian regulators conducted inspections in the wake of Western sanctions. McDonald’s recently said officials were inspecting more than 100 of the company’s 440 restaurants in the country.

Along with economic sluggishness, the political ramifications in Russia are hampering results in Europe, Kalinowski noted.

McDonald’s shares slipped 1.5% to $91.10 in recent trading.

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