Bringing customers back a focus for McDonald's

by Keith Nunes
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McDonald's restaurant
McDonald's store traffic has declined 10% since 2012.

OAK BROOK, ILL. — With the basis for a sustained turnaround in place at McDonald’s Corp., Steve Easterbrook, president and chief executive officer, said the quick-service chain is ready to build upon the success it has experienced during the past year. In 2015, the company initiated a turnaround plan that featured many facets, including the streamlining of the organizational structure, a shuffle of the leadership team, and a focus on the long term vs. quarter by quarter. Earnings and sales for fiscal 2016 showed progress, but expanding gains after such initiatives as all-day breakfast in fiscal 2017 may prove challenging for the company.

Steve Easterbrook, McDonald's
Steve Easterbrook, president and c.e.o. of McDonald's

“The purposeful changes we’re making also resulted in improved financial results,” Mr. Easterbrook said Jan. 23 during a conference call with securities analysts to discuss the company’s earnings. “Twenty-sixteen was our strongest year of global comparable sales since 2011.”

For the fiscal year ended Dec. 31, 2016, McDonald’s net income was $4,687 million, equal to $5.44 per share on the common stock and an increase compared with the previous year when net income was $4,529 million, or $4.80 per share.

Sales for the year fell 3% to $24,622 million when compared with the previous year.

During the fourth quarter net income fell 1% to $1,193.4 million, or $1.44 per share on the common stock, and sales fell 5% to $6,029 million.

McDonald's Big Mac sizes
McDonald's recently launched three Big Mac sizes.

“We expected some uneven performance in 2016,” Mr. Easterbrook said. “And fourth-quarter comparable sales were positive in all segments except for the U.S., where we anticipated a challenging lap due to our successful All Day Breakfast launch in October of 2015. Other markets such as France, Germany and Russia are also working to overcome challenges of varying degrees.”

A troubling trend facing McDonald’s is store traffic, which has declined 10% since 2012 when the company shifted away from the dollar menu in the United States.

“It’s not a one-year trend; it’s been slightly longer, and it’s something that’s dominated our conversations as we plan our business, and certainly the owner operators are very mindful of it as well, particularly here in the U.S., actually,” Mr. Easterbrook said.

McDonald's McCafe beverages
McDonald's has initiated an aggressive McCafe beverage value offer.

To address the issue he added that the company is investing in ways to put more choice and more control in the hands of customers, whether it is through menu adjustments, how food is served or how it is paid for.

“The other piece where we still have got to fight harder is on value,” Mr. Easterbrook said. “The McPick menu really does work well for customers, whether it’s the McPick 5 or the McPick on the more value end whether it’s $2, $2.50. But that alone isn’t winning us the market share fight on the value end.

“So you’ll have seen at the start of this year that we have an aggressive McCafe beverage value offer, which is $1 any size coffee or $2 on the small specialty McCafe beverages. You can expect to see us be more competitive at the value end through the year.”

McDonald's McPick menu
McDonald's McPick menu has seen success with customers.

Despite the traffic decline, per store cash flow has been positive for most McDonald’s franchisees, and Mr. Easterbrook added that increasing traffic and maintaining margins is a bit of a balancing act for company executives.

“Twenty-sixteen was a lively cycle for the cash flow with commodities at an all-time low and probably as aggressive as we’d want to be on pricing,” he said. “I think we’re going to — you’ll see us just bring, just carefully bring, pricing back more in line with food away from home, which we begin to see now.

“But the reality is this is not a new discussion for us in our business. Again, going back to the 20-year franchise agreement, we all know that for the benefit of our owner operator’s businesses over the long term you’ve got to be serving more customers more often. So that’s where we return to, but we know we can grow profitably and cash flow can grow alongside that.” 
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