McDonald’s falls short of profit target as competition heats up
McDonald’s Corp shares fell 4 per cent after missing profit expectations for the first time in two years due to the largest fast-food chain worldwide has weighing new expenditures to spruce up U.S. stores and speed up service.
Rival fast-food chains in the US have threatened their dominance with innovative meals and new menu items, including vegan burgers and meat substitutes introduced by competitors such as Burger King and KFC.
With customer traffic declining, McDonald’s has reworked its 14,000 U.S. restaurants to incorporate digital ordering kiosks, mobile ordering, pay-and-pickup services while partnering with the GrubHub, Uber Eats and DoorDash app-based delivery services.
This investment contributed to a 2 per cent rise to about US$3 billion in operating costs. According to IBES data from Refinitiv, McDonald’s posted a slightly smaller than expected profit of US$2.11 per share compared to the average estimate of US$ 2.21.
“The world is a different place than it was in 1955,” Steve Easterbrook, Chief Executive Officer, said during a call with investors.
“We’re fully aware we must be ahead of these changes, investing, executing and growing with a deep urgency and purpose,” he said.
US traffic was negative–according to TDn2K analysis, a sector-wide phenomenon was expected to continue until the end of the year, mainly because of deteriorating economic conditions.
Sales at US restaurants open for at least 13 months grew 4.8 per cent in the third half ended September 30, which is below Refinitiv’s estimated 5.17 per cent rise.
“Our gut tells us that McDonald’s was outcompeted in the third quarter by Wendy’s and Burger King,” Cowen analyst Andrew Charles said in a note.
Despite the American miss, Sara Senatore, an analyst for Bernstein, says that sales “continue to be among the best in the industry” and that shop upgrades will gain in future quarters.
Globally, comparable sales growth of 5.9 per cent was more pronounced than anticipated, compared with a strong performance in markets such as the UK and France.
In North America, interest in vegan burgers has jumped, and customers wait to see if McDonald’s is going to expand its Beyond Meat Inc burger project in Ontario, Canada, the US and other countries.
Easterbrook gave no indication other than that they were interested in such products and wished to get their flavour and marketing right.
“What we’re interested in is really how best to position this, get a sense of the flexitarian customer,” he said, referring to people who consume vegetarian diets, most but not entirely.
Net income fell by 2 per cent to US$1.61 billion a year, compared to US$1.64 billion a year ago.
Total revenue, including US and international operations, hit 5.43 billion dollars, just below the analyst’s anticipations of 5.49 billion dollars.
The company also expects to increase sales, general and administrative charges between 1 per cent and 2 per cent for 2019, excluding the impact of currency fluctuations.
McDonald’s anticipates distribution will generate US$4 billion in world revenue or approximately 4 per cent.
The service is now available in over 80 countries from some 23,000 McDonald’s restaurants. Easterbrook stated that on average guests spend twice as much on delivery orders as on in-store checks.
“Delivery remains a big frontier for our business, and we still have a long way to go,” he said.