Dollar Menu fails, McDonald's managed to eke out a higher profit for its first quarter even as the world's biggest hamburger chain failed to lift sales with its Dollar Menu.
The company
said Friday that an important sales measurement fell 1 percent during
the period and warned that it's expected to dip again in April.
That marked the first quarterly decline in a decade in sales at
restaurants open at least 13 months and underscored the troubles the
company has been facing.
As Burger King
and Wendy's have stepped up their marketing over the past year or so,
McDonald's has responded by aggressively touting its Dollar Menu and
other value deals to hold onto customers in an industry where imitation
is rampant.
The strategy has caused concern among analysts who worry that it could eat into profit margins. It's also rankled some McDonald's franchisees, who operate the vast majority of its restaurants in the U.S.
But in a conference call with analysts Friday, McDonald's executives
insisted that offering cheaper prices was necessary in the current
climate. Since the restaurant industry is barely growing, they said
McDonald's needs to steal customers away from rivals to grow.
"That battle for market share has become so critical for the long-term health of business, we're willing to sacrifice that margin," said Peter Bensen, the company's chief financial officer.
Although profit margins declined during the first quarter, McDonald's
noted that it picked off market share in many parts of the world,
including the U.S.
But there are signs such deals aren't sitting well with the independent franchisees who operate restaurants.
A survey by Janney Capital Markets released this week found that a sampling of 25 U.S. franchisees who collectively operate 180 McDonald's restaurants on average rated their relations with the company below their historic levels. Janney said some complained about excessive coupons and discounts.
Meanwhile, McDonald's emphasis on the Dollar Menu, which began last year, has had a ripple effect in the industry. Burger King recently said it's retooling its strategy and is now touting a deal for a $1.29 Junior Whopper, among others. Wendy's also revamped its value menu last year, saying it wants to offer customers more options.
The focus value menus and deals, which have long a staple in the traditional fast-food industry, is in contrast to attempts by the same chains to evolve and adapt to changing tastes. As more people flock to places such as Chipotle and Panera McDonald's has also tried to freshen up its offerings and raise the image of its food. In addition to the chicken McWraps, for example, the company is rolling out a version of its Egg McMuffin made with egg whites next week.
Such items are generally more expensive, and CEO Don Thompson noted that they could help improve margins in coming quarters.
For the three months ended March 31, the global sales drop included a 1.2 percent decline in the U.S. The sales figure fell 1.1 percent in Europe, the company's biggest region by sales.
It fell 3.3 percent in the region encompassing Asia, the Middle East and Africa, reflecting weakness in Japan and a 4.6 percent drop in China. The company blamed the decline partly on the aftereffects of the recent scare of the chicken supply for KFC, which is owned by Yum Brands Inc.
McDonald's Corp., based in Oak Brook, Ill., has more than 34,000 locations worldwide, about 14,000 of those in the U.S.
For the quarter, it earned $1.27 billion, or $1.26 per share. That compares with $1.267 billion, or $1.23 per share, a year ago.
Revenue edged up 1 percent to $6.6 billion.
Analysts expected a profit of $1.26 per share on revenue of $6.59 billion, according to FactSet.
Shares fell $1.99, or 2 percent, to close at $99.92 Friday.
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