10/27/2014 McDonalds Vows Fresh Thinking - WSJ - WSJ

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McDonalds Corp. outlined plans for what it called fundamental changes to its business as it reported one
of its worst quarterly profit declines in years, driven by problems in nearly every major part of its
business.
The 30% decline in net income for the period ended Sept. 30 was the latest in a string of disappointing
results for the worlds largest restaurant chain. It is struggling with weak sales in Asia, Europe and, most
important, its home market in the U.S.
In the U.S., an increasingly complicated menu has slowed service and McDonalds once reliable base of
younger customers have defected to fast-casual chains boasting customized ordering and fresh
ingredients, including Chipotle Mexican Grill Inc., and specialty-burger places such as Five Guys.
McDonalds has focused so far on efforts including increased staffing at busy times, and has shaken up
its management ranks, including replacing the head of its U.S. business for the second time in less than
two years. But the changes have yet to boost sales or profit.
The 4.1% decline in McDonalds September U.S. same-store sales marked the worst monthly U.S. same-
store sales performance since February 2003.
In response, McDonalds Chief Executive Don Thompson on Tuesday said it would simplify its menu
starting in January, in part to remove low-selling products, and plans to give the companys 21 domestic
regions more autonomy in rolling out products that are locally relevant.
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By the third quarter of next year, McDonalds also plans to fully roll out new technology in some
markets to make it easier for customers to order and pay digitally and to give people the ability to
customize their orders, part of what the company terms the McDonalds Experience of the Future
initiative.
The key to our success will be our ability to deliver a more relevant McDonalds experience for all of
our customers, Mr. Thompson said. Customers want to personalize their meals with locally relevant
ingredients. They also want to enjoy eating in a contemporary, inviting atmosphere. And they want
choices in how they order, choices in what they order and how theyre served.
McDonalds thrived through the global economic downturn. In the decade from 2001 to 2011, sales
nearly doubled and profit more than tripled. But Mr. Thompson, who helped drive that growth as head of
McDonalds U.S. business, has confronted a series of challenges since taking the top job in July 2012.
In China, a scandal at one of its meat suppliers has shaken customer confidence, driving same-store sales
down 9.9% in the latest quarter in McDonalds Asia/Pacific, Middle East and Africa region. In Europe,
broader economic softness was compounded by political complications in Russia, where authorities have
been inspecting and, in some cases, shutting McDonalds restaurantsmoves widely seen as retaliation
for U.S. sanctions in response to Russias military incursion in Ukraine.
The problems in China and Europe are considered to be short term. McDonalds said it would be another
six to nine months before the China business fully recovers. But the U.S. market, which accounts for
roughly 40% of its more than 35,000 global restaurants, is facing a fundamental shift in the way
Americans buy food. Young consumers, in particular, have been flocking to fast casual restaurants such
Chipotle and Panera Bread Co.
Mr. Thompson said he knows consumers want more transparency about the source of ingredients.
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McDonalds recently launched a social-media campaign in which it offers to answer questions about its
food, and he said McDonalds is considering offering organic food in some markets.
We recognize that we must demonstrate to our customers and the entire McDonalds system that we
understand the problems we face and are taking decisive action to fundamentally change the way we
approach our business, he said.
Analysts who participated in McDonalds earnings call on Tuesday remained skeptical about whether the
company can address bigger shifts in consumer behavior and win back younger customers without a
major overhaul of the menu to include healthier fare.
Tony Scherrer, director of research at Smead Capital Management, which owns more than 150,000
McDonalds shares, applauded the efforts. To add some components that would give you a sense of
local feel and health and for them to brand it as such would speak to the demographic theyve missed out
on, he said. For people to expect McDonalds to change their lineup in order to become a Chipotle is
unreasonable.
Edward Jones analyst Jack Russo said that while people want variety, customizing menu items at a chain
that derives about 70% of its sales from the drive-through could slow service even more. And becoming
more healthful isnt a panacea, he said, especially for a chain that has already tried adding salads, fruit
McDonald's shares are down with a decline in global sales and Coca-Cola unveils
a broader cost-cutting plan. MarketWatch's Sital Patel has the details. Photo:
Getty
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smoothies and oatmeal to its menu with little traction.
Theres a huge portion of the population that could care less about health and wellness, Mr. Russo said.
They need to get lower middle-income consumers back to their stores.
For the third quarter, profit fell to $1.07 billion, or $1.09 a share, from $1.52 billion, or $1.52 a share, a
year earlier. The latest result included tax-related charges of 26 cents a share, flowing largely from what
McDonalds said was an unfavorable tax-court ruling in a foreign tax jurisdiction that it didnt name.
Revenue fell 5% to $6.99 billion. Analysts polled by Thomson Reuters had expected earnings of $1.37 a
share and revenue of $7.18 billion.
The drop in quarterly profit was the steepest since 2007, according to Sara Senatore, an analyst at
Sanford C. Bernstein. Excluding one-time items like the tax charge, it was McDonalds worst quarterly
earnings decline since 2002, she said.
Shares closed 0.6% lower at $91.01 on Tuesday, leaving them down more than 6% for the year.
Chelsey Dulaney contributed to this article.
Write to Julie Jargon at julie.jargon@wsj.com