McDonald’s Corp. officials reaffirmed their optimism for business in 2012, despite slow economic growth and commodity cost inflation projected in major markets like the United States and Europe.
Speaking to investors and analysts during the company’s fourth-quarter earnings conference call, chief executive Jim Skinner said McDonald’s realized record-high revenue of $27 billion in fiscal 2011 as well as a 4.8-percent increase in domestic same-store sales — the best since 2006.
But McDonald’s will contend with headwinds this year, he said, particularly in the United States and Europe. The chain’s domestic system, which has more than 14,000 McDonald’s locations, faces commodity cost inflation that the company projects to rise between 4.5 percent and 5.5 percent, with increases in the mid-teens for beef, said chief financial officer Pete Bensen. In Europe, food cost inflation likely would compound continued pressure from austerity measures in several countries.
To keep growing in this environment, McDonald’s will stick to its Plan to Win, Skinner said, built around menu innovation, broadening accessibility and reimaging restaurants.
“Our overall business model continues to serve us well in any environment, as long as we propel ourselves with the proper levers of our business,” Skinner said. “The most important thing around the world for the past eight or nine years has been everyday affordability.”
U.S. to focus on core strengths
Skinner said several new products would join McDonald’s menu in 2012, including the Cherry Berry Chiller frozen beverage, Blueberry Banana Nut Oatmeal and Chicken McBites, a popcorn chicken limited-time offer that began nationwide promotion Monday. But the chain intends to drive much of its sales this year through “core” items, like Big Macs and Chicken McNuggets, he added.
Watch a commercial for Chicken McBites; story continues on the following page
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Bensen said the expected commodity inflation for 2012 includes significant increases in the first quarter. Regarding pricing, McDonald’s philosophy would remain intact, he said, where the chain could raise prices to offset some, but not all, commodity cost inflation.
The company took 3 percent of price increases through 2011, including a hike of less than 1 percent in November, and would continue to use projections of food-away-from-home price inflation in the United States — estimated to be between 2 percent and 3 percent this year — as a “guide rail” for its pricing actions.
McDonald’s achieved its highest market share of the quick-service segment ever in 2011, taking another 0.5 percent of share to reach 12.5 percent, Bensen said.
President and chief operating officer Don Thompson said several areas on and off the menu could provide sales and profit growth to McDonald’s in the coming year. While the breakfast and McCafe menus maintain their momentum, opportunities also would exist for limited-time offers, he said.
“What the U.S. has not done as much yet is tap the global pipeline, like the more premium sandwiches from Europe,” he said. “We still have opportunities there in the U.S., and the team is looking at that.”
Operations-related opportunities exist as well, like opening more restaurants for 24-hour service and leveraging a new point-of-sale system for increasing capacity at peak hours, he said.
Skinner added that improving through-put at peak times comes down to more than the double drive-thru, a key feature of the more than 900 remodels in the United States last year, or a new POS system. Practices in scheduling and positioning in the dining room also enable McDonald’s to handle its growing guest counts.
“It’s not all technology,” he said. “A lot of it is scheduling, positioning and planning for the shift to facilitate faster service, which begets more customers.”
The chain plans to remodel more than 800 U.S. locations in 2012.
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Europe tries to prosper in austerity
Countries across Europe are dealing with varying levels of financial weakness and austerity measures, such as value-added taxes in Portugal and elsewhere, meaning McDonald’s would have to apply different strategies from market to market in 2012 to maintain sales growth, officials said.
Thompson quipped that Europe’s main challenge is “that there’s not one country called Europe,” meaning that Spain’s 22-percent unemployment has driven a mix shift toward McDonald’s value products in that country, while France and Germany are more resilient and selling more premium sandwiches. The United Kingdom, which also enacted austerity measures, “has movement across all price tiers,” he said.
“What we do in those markets is what helps us modify our sales mix,” Thompson said. “Europe has done a great job on promoting premium-based products, and those have helped us in terms of generating income.”
McDonald’s took a 2-percent price increase throughout 2011 in Europe, excluding Russia, which had significantly higher commodity inflation than the rest of the division.
“In Europe, as we head into 2012, we expect commodity increases to be lower compared with 2011,” Bensen said. “While we’ll have some new austerity measures, the magnitude of those will be lower than in 2011. We’re still optimistic we’ll be able to take some price.”
Thompson added that Europe “still has a lot of room to go” on other sales-driving opportunities, like building more drive-thrus and generating a greater percentage of sales from the pick-up window.
“If you look at Europe, we also have a long way to go with breakfast,” he said, adding that the Asia/Pacific, Middle East and Africa, or APMEA, division is rolling out breakfast at a quicker pace into fast-growing markets like China.
In APMEA, aside from continued strength in China, which added 200 restaurants in 2011, McDonald’s officials also forecast recovery in Japan this year. That country, which suffered major interruptions to business after the March 11, 2011, earthquake and tsunami, is going forward with an emphasis on breakfast, officials said.
Thompson added that many parts of APMEA would adopt more menu items from around the world in 2011, such as Real Fruit Smoothies from the United States and premium burgers from Europe.
Oak Brook, Ill.-based McDonald’s operates or franchises more than 33,000 restaurants around the world.