By Heather Haddon
McDonald's Corp. needed promotions and price increases to help
boost sales in the third quarter as the world's biggest burger
chain by revenue works to lure more customers.
Shares of McDonald's, up 18% in 2019 through Monday's close,
slid 5% Tuesday as quarterly earnings and U.S. sales fell short of
expectations.
The company said same-store sales grew 5.9% globally in the
quarter, above the 5.4% that analysts polled by FactSet were
expecting. But U.S. sales, growing by 4.8%, were down from the
previous quarter and below analysts' expectations.
It still took offerings and promotions, along with a nearly 3%
increase in menu prices in the U.S., to boost sales, the
Chicago-based company said. McDonald's Chief Executive Steve
Easterbrook told investors Tuesday that renovated stores, digital
kiosks and technology investments are helping to boost sales and
visits, even if they are siphoning off profits to implement.
"The world is different than it was in 1955," Mr. Easterbrook
said, referring to when McDonald's began franchising. "We're keenly
aware that we have to be out ahead of these changes."
Restaurants across the industry have increased menu prices to
help boost sales as labor and other expenses grow. Consumer prices
for food served at restaurants have grown recently by 3.2%, an
increase not seen since 2009, Labor Department data show.
Fast-food competition continues to be intense, particularly for
burger-focused chains.
Visits to U.S. fast-food burger restaurants were down 1% in the
year ended in August, according to research firm NPD Group Inc.
That was weaker than the average for fast-food restaurants, which
saw a 1% increase during the period.
Mr. Easterbrook said McDonald's grew its share of the burger
market during the quarter, but lost out in other areas, including
chicken.
McDonald's was largely an afterthought during the so-called
chicken sandwich wars that bubbled up late this summer, and the
company said Tuesday that it noticed competitive pressure heighten
during the period. "We did go a little bit the opposite way on
chicken," Mr. Easterbrook said.
McDonald's last month tested a new spicy buttermilk chicken
sandwich as it seeks to compete with crispy poultry offerings from
Popeyes Louisiana Kitchen and Chick-fil-A.
It has been fighting for years to boost customer visits. U.S.
customer transactions continued to drop in the quarter ended in
September, though they grew overall globally.
McDonald's has struck a number of technology deals this year to
try to boost sales and improve operations. But those deals are
driving up expenses. The company said Tuesday that administrative
expenses grew 6% during the quarter, and McDonald's now expects
those costs to grow by 1% to 2% during the fiscal year. Previously,
the company expected those costs to be flat for the year.
McDonald's executives said they expect the drag from technology
spending to be short term, and that digital kiosks, mobile ordering
and other technology investments are now boosting sales.
"Our belief is those who aren't investing in technology, at some
point will be behind," McDonald's Chief Financial Officer Kevin
Ozan said.
The burger chain acquired Silicon Valley-based tech startup
Apprente last month to tap the company's voice-activated technology
to try to speed up service in its drive-throughs. McDonald's
acquired Israeli startup Dynamic Yield earlier this year to use AI
in suggestive ordering, and is now operating in more than 9,500
U.S. restaurant drive-throughs.
McDonald's has placed increasing emphasis on delivery, striking
deals with DoorDash Inc. and Grubhub Inc. to bolster its existing
to-go business with Uber Technologies Inc.'s Uber Eats
division.
Delivery comes with a hit on restaurant margins, something
McDonald's franchisees have pushed back on and the company has
sought to address through its negotiations with third-party
operators.
McDonald's expects delivery to account for $4 billion in sales
globally by year-end, with an order for its food now placed every
10 seconds.
McDonald's is following competitors into the plant-based meat
craze. The company last month announced it is testing sandwiches
with Beyond Meat Inc. patties in Canada.
"We're interested in this clearly," Mr. Easterbrook said about
plant-based offerings.
McDonald's faces growing competition in key parts of the
business. Breakfast, a part of the day it once dominated with Egg
McMuffins and hash browns, has seen rival chains pile in as they
also hunt for growth.
Mr. Easterbrook said the chain has seen some improvement in
breakfast sales in the most recent quarter, but that part of the
day remains competitive and will get more so as Wendy's Co. rolls
out morning meals nationally next year.
Earnings of $1.6 billion were down 2% from a year earlier when
accounting for currency fluctuations. The company reported earnings
per share of $2.11 and sales of $5.4 billion. Analysts polled by
FactSet expected earnings per share of $2.21 adjusting for one-time
items, and $5.5 billion in sales.
Company executives said the income miss was minimal, while they
chalked up differing ways of calculating margins to the gap with
analysts on earnings. Lower gains in sales of company-owned stores
in the U.S. contributed to the miss, McDonald's said.
Write to Heather Haddon at heather.haddon@wsj.com
(END) Dow Jones Newswires
October 22, 2019 22:21 ET (02:21 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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