McDonald’s Corp. benefited from its aggressive pursuit of higher guest counts in the first half of the year along with favorable commodity costs, contributing to gains in operating profit across all its worldwide divisions, company officials told investors Friday.
Chief operating officer Don Thompson said during an earnings conference call Friday that traffic-driving initiatives like the Breakfast Dollar Menu and the $1 any-size beverage promotion were generating enough volume to offset a lower average check at its U.S. restaurants. Same-store sales at domestic units rose 3.7 percent for the June 30-ended second quarter, McDonald's reported.
The company also cited its remodeling program and an expanded McCafe line of specialty drinks as it recorded a 12-percent jump in second-quarter net income. Click here for more on McDonald's latest results.
“Of all our markets around the world, the U.S. is a market where guest counts are outpacing comp sales,” Thompson said. “This was a very deliberate approach based on the economy. More than 100 percent of our comp-sales growth was driven by guest counts. The Breakfast Dollar Menu reached out to those with lower disposable incomes right now so that they could still come into McDonald’s, and as a result we’ve got strong guest count growth.
"The U.S. business is in good stead, and that’s without any substantial pricing increase at all, so there’s still a lot of upside,” he added.
Other highlights from the call:
• McCafe
Thompson said the McCafe premium-beverage strategy has performed very well, surpassing the goal of adding an incremental $125,000 in annual sales per restaurant.
“We’re definitely exceeding those numbers, definitely with the launch of Frappes and Real Fruit Smoothies, and those aren’t the last products you’ll see [in the line],” Thompson said. “Beverages are more accretive to broader margins, but you’ve got balances elsewhere. This year we have an aggressive breakfast value [proposition], which doesn’t support margins from a percentage perspective, but it brings in more business. On the other hand, the smoothies and Frappes do support margins.”
He added that coffee-based drinks have gone from 2 percent of McDonald’s sales five years ago to 6 percent currently, without including some beverages from the McCafe line like Real Fruit Smoothies.
Chief financial officer Pete Bensen added that, while it’s too early to tell the specific incremental impact the Frappes and Real Fruit Smoothies have had on guest traffic, McDonald’s has seen an increase in the number of one- and two-item transactions, while customers typically tend to get closer to four items per order. That trend indicated that guests were coming in specifically to try one of the new premium beverages, he said.
Thompson added that all dayparts are trending positive, with very strong movement in breakfast guest counts helping offset the lower average check due to the Breakfast Dollar Menu and the $1 beverage promotion.
• Commodity costs
Bensen said second-quarter operating margins benefited primarily from lower food and paper costs and, to a lesser extent, the impact of refranchising.
“In the U.S. for the quarter, almost all of that increase was driven by commodity costs,” Bensen said. “In this environment, we’re focused on driving guest counts, and the environment is not conducive to increasing prices. We achieved these margins with basically zero price increase, so that was coming from the back-door cost. There was some carryover from our refranchising efforts, but most of it was from the back-door costs.”
Bensen said the company expects commodity costs to remain lower throughout the balance of 2010 compared with a year earlier, though at a rate not quite as favorable as the first half of the year.
• Restaurant revamps
Remodeling restaurants in the United States and several international markets remains a key investment for the brand, Bensen said.
“We see reimaging stores as a game-changing differentiator,” he said. “It helps our restaurants stand out in a crowded marketplace and elevates our brand, as well as growing sales, market share and profitability.”
McDonald’s is on pace to remodel another 400 locations over the next nine months, he said. To date, the company has received nearly 500 commitment letters to refurbish stores from owner-operators across the country. Bensen said the remodels average about five months to complete but in some cases could take as long as a year based on permitting issues. McDonald’s contributes about $150,000 to $200,000 toward reimaging costs per franchised restaurant.
• Expansion in China
Thompson and Bensen expressed optimism for China as an area for growth in the near future. McDonald’s has opened 48 restaurants in China this year and is on pace to open as many as 175 in that country in 2010, which would represent a 15-percent increase over its base.
“We absolutely believe China can accelerate growth,” Thompson said. “Returns are stronger there now, and the economy has picked up in China. … We’ll benefit from increased disposable income there. Another thing we’re seeing is that we’re increasing our marketing spend in China, and it’s helping us drive sales results.”
Oak Brook, Ill.-based McDonald’s operates or franchises more than 32,000 restaurants in more than 100 countries.
Contact Mark Brandau at [email protected].