McDonald’s (MCD)
Earlier today McDonald’s Corporation (MCD: Charts, News, Offers) announced comparable-store sales rose 4.8% in May. Same-store sales in the US came up 3.4%, 5.7% in Europe and 3.8% in Asia, the Middle East and Africa. Analysts had projected an increase of 4.5%. There are three reasons for the McDonald’s gains: cheap meals, beverages and global expansion.
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Stock Analysis
McDonald’s is the largest restaurant chain in the world. The golden arches are a true global icon, popping up everywhere from Chicago to New York to London to Tokyo and Beijing. This ubiquity is a part of the reason for McDonald’s success. The restaurant is everywhere and even consumers who do not necessarily prefer menu offered by McDonald’s still find themselves pointing their cars toward the drive through because of the convenience, price and speed of service. McDonald’s is easy to find and we always know what we are going to get. Even though the franchises seem to be everywhere, McDonalds continues to aggressively expand. The company has close to 33,000 locations in 110 countries and shows no sign of stopping as McDonald’s opens an average of 1,000 new locations annually.
The McDonald’s menu is almost always the same, but the store tries to integrate the local tastes into its menu whenever possible. This has proven particularly beneficial to the company as it seeks to expand in the Middle East and Asian markets. McDonald’s selection as the “official restaurant” of the 2008 Beijing Olympics was a big shot in the arm for Far East expansion.
However, market saturation is not the only successful strategy for profitability on the part of McDonald’s, the most recent surge in sales has been largely attributed to the new beverages that McDonald’s introduced for the summer: frappes and smoothies. The cold beverages are just the next step in the McDonald’s strategy to become a beverage destination. Over the past couple of years, they have taken on coffee giant, Starbucks by adding coffee-based specialty drinks to the menu with mixed results, but the cold drinks might be a better fit for the restaurant. Telsey analyst
Tom Forte believes that “Beverages will likely drive traffic in the U.S. from Memorial Day to Labor Day” and that “the beauty of smoothies is, they may be able to boost afternoon traffic” for McDonald’s. Many McDonald’s franchises are reporting that their number one selling item is beverages.
Not all of the news is good for McDonald’s however. There is increasing concern about the European market as Europe provides 25% of McDonalds operating income. The weakness of the euro and the overall financial uncertainty on the continent are shrinking expectations for profit from that sector for McDonald’s Corporation in the first quarter. The company believes that second quarter results will improve.
Another potential weight on McDonald’s profits is the recent recall of over 12 million glass drinking cups. The glasses were manufactured in France by ARC International North America Inc. and are a part of McDonald’s promotion of the movie “Shrek”. There are concerns about the level of cadmium that is present in the glasses. The containers met federal standards, but decided to initiate a recall based on the “evolving assessment of standards for cadmium in consumer products”on the part of the US Consumer Product Safety Commission.
McDonald’s normally has airtight supervision when it comes to the approval of promotional toys, so they are hoping that the issue with the Shrek glasses is an isolated incident. Indications are that consumers will continue to flock to the Golden Arches in pursuit of the new beverage offerings – as long as the drinks are held in the traditional McDonald’s wax board cups.
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Joshua Caucutt is long-time market follower and finance writer. Debt management, entrepreneurship and government economic policy are areas of emphasis. He regularly contributes to the
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