McDonald's is hoping all-day breakfast will be just as successful as the secret ingredient it added to its menu this quarter.
McDonald's CEO Steve Easterbrook just got a reprieve. Had the hamburger chain's earnings registeredanother dismal quarter, he might not have been long for the position. But McDonald's surprised its critics by reporting its first sales increase in two years. Global comparable sales jumped 5%, reflecting favorable gains across all segments, and same-restaurant sales even rose 0.9% in the United States.
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It was a remarkably good quarter for a company that has been on the ropes and grasping at straws, but I remainunconvinced McDonald's has really turned the corner. Here are three reasons I think it's doubtful the good times will last.
1. The bar was set lowThe numbers look good, but McDonald's was going up against an easy comparison.Last year's numbers were terrible, with global and U.S. same-store sales down 3.3% each. That made it easier to take a victory lap this time, and thoughthis quarter looks like a good start, investors driving up McDonald's stock by 8% on the basis of one quarter's results is counting their cage-free eggs before they're hatched. Considering the burger chain's poor history, ensuring this isn't just a one-off event before celebrating would be prudent.
2. Butter is not a believable driverNone of McDonald's initiatives to reverse falling sales has worked. Despite Easterbrook's misguided focus on matching ChipotleMexican Grill -- what one analyst has termed an "obsession" -- by introducing fresher, more wholesome ingredients; allowing order personalization; and adding customized ordering kiosks, they didn't make a difference. What did? Butter.
Changing the recipe in this simple McMuffin sandwich was all that was needed to change McDonald's fortunes. Photo: Hakan Dalstrom.
McDonald's credits its new buttermilkchicken sandwich and a return to the original Egg McMuffin recipe using butter instead of margarine as the keys to its revival.All those expenses it foisted on franchisees in an attempt to become more like a fast-casual restaurant? Pffft! They were for naught.
Although Easterbrook said McDonald's saw double-digit McMuffin sales once it made the change, it's doubtful that could have driven so much traffic, as the changeover wasonly widely reported at the very end of August.It may have started using butter sooner, but who even knew it was happening?
And the new chicken sandwich was only introduced in the middle of the month.It seems specious to pin its success on those two simple menu additions.
3. It's still not a value destinationDespite constantly saying it's committed to returning to its value roots and reducing menu complexity, McDonald's continues to go in the opposite direction. Even its new quarter-salvaging chicken sandwich is another example of running against those commitments. Not that it shouldn't experiment with new products -- it can and needs to just to keep things fresh -- but at some point it has to show a willingness to follow through on its pledge. Even Easterbrook admitted McDonald's is still "weak" on the value end of the menu, but that is where its greatest potential lies.
The real reason the arches were golden againAlthough McDonald's was finally able to have a laugh at the expense of its critics, the real reasonit generated positive results this quarter wasn't chicken or butter, but likely the halo effect of launching all-day breakfast.
It's true the change didn't occur until after the third quarter ended, but it began testing the program earlierthis year, and the probability customers could order butter-soaked Egg McMuffins any time of the day began being discussed in earnest in July.Prolonged media speculation about when it would begin probably fueled consumer interest in McDonald's once again. When all-day breakfast was confirmedat the start of September, it undoubtedly heightened the buzz further.
But that doesn't mean all-day breakfast is a panacea. IHOP andSonicoffer all-day breakfast, but Sonic, which hasn't had the same problems attracting customersas its sales growth has been strong for some time,says it's not a "big deal." It wasn't worried at all that McDonald's was going to compete for breakfast dollars.
With thefrustrationsfranchisees have expressed with itsrollout, McDonald's shouldn't expect much of a lasting impact, either.Once the hype dies down, McDonald's may find all it's done is draw sales away from the breakfast daypart its dominated for so long. It won't have created new customers so much as give existing ones a choice of when to order.
Granted, McDonald's proved me wrong this quarter, and Easterbrook has put off for at least another quarter speculation on how long he'll last in the CEO's job. But even McDonald's strongest bulls shouldn't be breaking out the bubbly just yet, at least not until the burger joint shows its recovery is more than one quarter long.
The article 3 Reasons McDonald's Corp.'s 1st Sales Increase in 2 Years Isn't a Big Deal originally appeared on Fool.com.
Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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