McDonald's modifies business strategy as sales, earnings drop

Tests custom burgers, other concepts

In what was one of its worst financial performances in the last decade, McDonald's on Friday reported sharp declines in sales and earnings, further evidence of the impact of tough competition and changing consumer tastes on one of America's biggest and best-known restaurant brands.

What's more, the company warned that it saw no end in sight, tamping down any shred of enthusiasm by saying that it expected to continue to struggle at least through the middle of this year. "We took a number of important steps to lay the foundation for our turnaround," Don Thompson, the chief executive, said in a conference call with investment analysts. "We're acting with a sense of urgency as these steps are critical to addressing current performance and to advancing our longer-term strategies."

McDonald's is testing a number of new concepts, including a kiosk in four stores in Southern California and one in Australia that allow customers to design and order their burgers from a menu of meat patties, buns, condiments and toppings.

It has simplified its menu, reducing the number of "value meal" promotions, groups of items that together cost less than ordering items individually. It also tweaked its "dollar menu," raising the price of many of the items to more than a dollar. And it recently signed a deal to begin selling its coffee in grocery stores.

It even has quietly opened a sandwich and salad shop in Australia, a bit of a hybrid of Panera and Starbucks, with no sign of a golden arch or Ronald McDonald anywhere.

Working to change perceptions that McDonald's food is less healthy, the company has also begun pushing videos on social media that show how it makes its product - though some investment analysts have debated whether telling customers it uses 19 ingredients in making a McDonald's French fry is the best idea at a time when consumers are seeking simplicity in the food they eat.

"They're throwing a lot of spaghetti at the wall, but it's not clear that any of it is the right spaghetti," said Sara Senatore, an investment analyst at Sanford C Bernstein & Company. "They have all of these things going on and it's not obvious that's what consumers want from McDonald's."

The problem, though, is that it will take time for any of those changes to pay off significantly - it took McDonald's two years to roll out its premium wraps. In the meantime, chains like Chipotle and Five Guys have consumers in thrall, and McDonald's more traditional competitors, like Burger King and Wendy's, have stepped up their game. Sonic, for instance, recently announced that sales in its stores open at least a year rose 8 per cent.

Senatore said the most positive development she saw were in price reductions McDonald's has been taking after maintaining higher prices than its competitors for some time. "To me, it's the down and dirty fight of couponing and value that's going to help McDonald's quickly turn the corner," she said.

The company said that its revenue in the quarter ended December 31 fell 7 per cent, to $6.6 billion. Earnings plunged 21 per cent, to $1.1 billion from $1.4 billion in the same period a year ago.

Earnings dropped to $1.13 a share from $1.40 in the same period a year ago, in part because of the company's need to set aside greater reserves for taxes and also because of continuing problems with a supplier in China. Without those items, earnings per share would have fallen 3 per cent for the year, the company said.

Thompson noted that while the results fell short of the company's own expectations, sales were also hit by events beyond its control. Sales in Asia and West Asia were crimped in the latter half of the year when one of its meat suppliers was forced in late July to close a processing facility in China after a food safety scandal, and the company has had shortages of French fries in several markets because of a slowdown at the Port of Los Angeles.

Events in Russia and Ukraine also wreaked havoc with plans, and like many companies that do business globally, currency fluctuations had a negative impact on McDonald's finances.

McDonald's said on Friday that it planned to open fewer stores this year and that it planned capital investments of just $2 billion, the least in more than five years.

©2015 The New York Times News Service

TWIST IN TASTE
McDonald's on Friday reported sharp declines in sales and earnings, marking one of its worst financial performances in the last decade. Tough competition and changing consumer tastes have prompted America's biggest and one of the best-known restaurant brands to take urgent steps. Here are some

• Testing a number of new concepts, including kiosks and stores that allow customers to design and order their burgers
• Simplified its menu, reducing the number of "value meal" promotions
• Tweaked its "dollar menu," raising the price of many of the items to more than a dollar
• Recently signed a deal to begin selling its coffee in grocery stores
• Has quietly opened a sandwich and salad shop in Australia
• Pushing videos on social media that show how it makes its product