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Analysts: McDonald's to battle pitfalls with innovation

Analysts: McDonald's to battle pitfalls with innovation

The company revealed new products and upgrade plans during an analyst tour of its Innovation Center

Volatility in several economies, including the United States, will continue to pressure McDonald’s sales and earnings growth in 2012, but the brand plans to modernize itself past potential problems, according to securities analysts who toured the company’s Innovation Center last week.

Analysts were shown several parts of the Innovation Center, where McDonald’s shares and refines best practices from all areas of the world. The company expects to host staff from 40 different countries representing about 27,000 restaurants at the center in 2012.

Executives said the new-product pipeline currently has more introductions planned than ever, and successful traffic drivers from the beef platform in Europe, the chicken platform in Asia and the beverage platform in the United States would be exported around the globe.

Bryan Elliott of Raymond James & Associates said McDonald’s global modernization program would include its ongoing remodeling program, as well as customer-facing ordering technologies and platforms to help managers increase throughput.

“We believe the company’s remodeling program has been a key driver of the brand’s global market share gains in the past decade,” Elliott wrote. “We expect global comps to continue to benefit — a 5-percent to 6-percent lift is typical post-remodel — as additional markets reach a critical mass to impact customer perceptions.”

McDonald’s said the reimaging program, to which it contributes about 40 percent of the capital expenditures franchisees need to complete, has resulted in more than half of all global interiors and 30 percent of all global exteriors getting updated. Franchisees are now able to choose from
a variety of remodel packages, officials said.

Within its restaurants, the brand plans to test and introduce self-ordering kiosks, mobile ordering and digital menu boards, which allow for more flexibility with promotions and up-selling. Some units will also test separate service points, in which guests order at one spot and pick up their food at a separate location.

Back-of-the-house upgrades could expand capacity in McDonald’s restaurants up to an estimated 30 percent, wrote Jeffrey Bernstein of Barclays Capital, who also toured the Innovation Center with McDonald’s chief financial officer Pete Bensen, McDonald’s Europe president Doug Goare and chief restaurant officer Jeff Stratton. Those improvements include a high-density prep line in the kitchen that would allow for increasing menu complexity while reducing overall energy costs.

Managers soon could have tools that are better at reporting real-time ordering data, to schedule staff more efficiently, and the new point-of-sale system in place at most McDonald’s units has more intuitive keystrokes to simplify operations for cashiers.

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Tough days lie ahead in 2012

The new products, menu strategies and technology platforms McDonald’s is modeling and testing at its suburban-Chicago Innovation Center would be needed to address the “perfect storm” of challenges the company faces in 2012, Sara Senatore of Bernstein Research wrote in a research note. Those pitfalls include weak consumer demand in Europe, foreign-currency exchange headwinds, global commodity inflation, and increased capital expenditures for sponsoring the Olympics, remodeling restaurants and rolling out new technology.

“The Innovation Center evidenced McDonald’s relentless pursuit of operational excellence, suggesting to us that hamburger competitors will find it difficult-to-impossible to catch up and that McDonald’s will defend successfully its market leadership,” Senatore wrote. “In the near term, however, Europe remains a challenge, and investments will continue, depressing earnings growth.”

Bernstein agreed that McDonald’s still is in for a “tough year,” especially after three markets “went off track” last month to contribute to disappointing global same-store sales in April.

RELATED: McDonald’s: Special offers drove April same-store sales growth

McDonald’s 3.3-percent increase in same-store sales in April fell below the company’s guidance, due to a broader slowdown in quick service, increased remodels and rebuilds compared with the year earlier, and less-than-anticipated supply and promotion of its new blueberry oatmeal product, the company told analysts.

Japan and Australia’s sales also underperformed expectations, the company said. Japanese consumers remain hard to predict more than a year into the country’s recovery from the March 2011 tsunami, and McDonald’s expects results in Japan to remain “choppy.”

Meanwhile, Australia’s market increased traffic with a “Loose Change” value menu promotion, but it also caused more erosion to the average check than anticipated. While the result is a short-term trade of average check for traffic gains — seen elsewhere in the industry with recent marketing moves from Wendy’s and Red Robin — McDonald’s officials said the improvements in guest counts would positively benefit the Australian market over the long term.


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Europe looms as the biggest concern currently, and officials took a cautious tone laying out the ways in which McDonald’s could combat the continent’s weak economy, wrote David Tarantino of RW Baird.

“Management expressed confidence in its ability to navigate macroeconomic headwinds by staying focused on capturing market share through internal initiatives,” Tarantino wrote. “McDonald’s seemed upbeat about the outlook for the U.K. and Russia, collectively about 20 percent to 25 percent of Europe segment’s profit. The company intends to dial up the value message in Germany and France — about 40 percent to 45 percent of segment profit — in order to sustain solid traffic trends amid a softer consumer spending backdrop.”

Oak Brook, Ill.-based McDonald’s operates or franchises more than 33,000 restaurants worldwide, including more than 14,000 locations in the United States.

Contact Mark Brandau at [email protected].
Follow him on Twitter: @Mark_from_NRN

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