Dive Brief:
- McDonald's posted third-quarter earnings that topped analyst expectations, reporting revenue of $5.37 billion compared to Wall Street projections of $5.32 billion, according to a company release. But these results were weaker than the $5.75 billion in revenue posted in the year-ago period, a 9% decline the fast food company linked to its refranchising efforts.
- Same-store sales grew 2.4% in the U.S. and 4.2% globally, marking the fast food chain's 13th-straight quarter of positive same-store sales growth. The company attributed the uptick in domestic same-store sales to menu price increases and product mix changes, which led to a higher average check.
- These results come just a few weeks after frustrated McDonald's franchisees, who are feeling pinched by the speed, cost and scale of the chain's restaurant innovations, met in Tampa, Florida, to discuss forming an independent owners association.
Dive Insight:
These strong earnings results suggest that McDonald's extensive "Experience of the Future" store remodels and tech innovations — including touch-screen ordering kiosks, revamped dessert counters and new menu offerings — are beginning to pay off. But these investments may not be driving returns fast enough.
"... a slowdown in the growth rate, especially within the US, is evident," Neil Saunders, managing director of GlobalData Retail, wrote in a note. "In our view, this is partly understandable given that McDonald's is coming up against some tougher prior year comparatives. However, it is also problematic inasmuch as it comes at a time when McDonald's is investing more in the business and is introducing more complexity to its operations."
It seems that at present, domestic sales growth isn't strong enough to offset the costs of these initiatives. The fast food chain's overall operating profit slipped 1%, but fell by 7% in the U.S. The company's sluggish results what have driven McDonald's franchisees to consider forming a private association, which could help restaurant operators consolidate their power and better voice grievances against the expensive and rapid clip of its remodel plans.
The company recently invested another $6 billion to transform 1,000 locations each quarter, a move made in response to growing competition in the fast food space and declining customer traffic. Though this push is ambitious, it may be needed to get the restaurant's growth back on track — earlier this year, the company reported that it has lost 500 million sales to rivals since 2012.
But if its onslaught of menu changes and digital innovations don't lead to stronger financial results soon, it could further erode the company's relationship with its restaurant owners, potentially causing a whole new set of problems. Only 800 of McDonald's 14,000 U.S. locations are company-owned, and a private association would give franchisees the ability to do some damage. (Jack-in-the-Box's franchisee association just voted to oust the chain's CEO.)
Meanwhile, McDonald's international performance was an encouraging bright spot for the period. The company reported that its comp sales in its international lead markets division exceeded analyst expectations, increasing 5.4%. The restaurant's sale of its Chinese assets dragged revenue, but its global comp sales uptick is encouraging.
"McDonald's does have other growth opportunities, including delivery with Uber Eats and driving sales of items like coffee and associated snacks. However, the coffee market is very crowded and the delivery market is becoming more competitive. So, again, McDonald's needs to do more to stand out," Saunders said.
