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McD: Price increases haven’t hurt traffic

A Heard on the Call report covering menu, pricing, remodels and international markets

McDonald’s Corp. attributed the brand’s strong second-quarter earnings to efforts to expand accessibility for guests in the United States and around the world with modernized restaurants and new menu items.

The company also said two price increases in the United States, which stemmed from its need to battle rising food costs, was not affecting traffic or leading to a change in menu mix.

For the June 30-ended second quarter, McDonald’s net income rose 15 percent to $1.41 billion, from $1.23 billion in the same quarter a year earlier. Earnings per share rose 19 percent to $1.35, from $1.19. Second-quarter revenue rose 16 percent to $6.9 billion, reflecting an increase in global same-store sales of 5.6 percent.

Same-store sales rose 4.5 percent in the United States, 5.9 percent in the company’s European division and 5.2 percent in the Asia-Pacific, Middle East and Africa, or APMEA, division.

Frozen drinks are hot in U.S.

McDonald’s chief operating officer Don Thompson said a very strong June propelled McDonald’s second-quarter domestic same-store sales to a 4.5-percent increase. Driving that bump was advertising the 20-piece McNuggets item with new dipping sauces, introducing McCafé’s Frozen Strawberry Lemonade and Mango Pineapple Real Fruit Smoothie. Two previous menu price increases also drove the same-store sales result. In a research note earlier this week, securities analyst Mark Kalinowski of Janney Capital Markets projected a 4.6-percent quarterly increase in domestic comparable sales, based on a prediction of a 7.3-percent spike in U.S. same-store sales.

Total McCafé sales rose 29 percent in the second quarter compared with the same quarter of 2010, Thompson said during a conference call with investors.

“From a percent-of-sales perspective, we still view ourselves as an underdog in frozen beverages,” Thompson said. “Being the underdog is a great thing because we have even more opportunity to take share, and we can do it at the speed of McDonald’s.”

The chain’s price increases of 1 percent in March and 1.4 percent in May have not affected flow-through or menu mix negatively, officials said.

“We’re seeing good reaction to the price increases so far,” said chief financial officer Pete Bensen. “After the one in March, flow-through was above average, probably because we hadn’t taken a price increase in so long. It’s too early to read May’s, but based on June results, it’s also being accepted … Is it changing consumer behavior? Not really, because we’re not seeing a dramatic spike in the Dollar Menu.”

Thompson added that the Dollar Menu still accounts for between 10 percent and 11 percent of sales.

“The mix has stayed basically the same, but we’ve got a lot more customers coming into the restaurants,” he said. “Being able to talk about core products and premium items like Angus [Third Pounders], along with beverages and along with value, really helps us win.”

Thompson would not specify whether McDonald’s gains in market share have come at the expense of any particular competitor or segment, but pointed out that the chain’s sales growth has been incremental across many categories. Oatmeal has helped bolster breakfast sales, and $1 soft drinks have combined with McCafé upgrades to keep beverage momentum strong, he said, while initiatives to increase through-put and peak-hour performance — 40 percent of the U.S. system has 24-hour or extended-hour service, and there are now 2,200 double drive-thrus in the United States — also add to the top line.

Even increased competition from “better-burger” brands like Five Guys helps McDonald’s, he added.

“More premium-burger chains coming into the marketplace is good for us,” Thompson said. “Those burgers have a higher margin, and we have some of those same menu offerings, and when [other brands] advertise them, we get the benefit. We’ll manage it appropriately from a price perspective and offer it at a value proposition appropriate for us.”


Restaurant reimaging and an emphasis on value drove double-digit gains in operating profit in McDonald’s other areas of the world, Thompson and Bensen said. Upgrading the look and feel of restaurants in Europe contributed to operating-profit growth of 10 percent in constant currencies across those markets, which benefited from particularly strong sales in Russia, France and the United Kingdom.

Modernizing restaurants and promoting premium menu items has helped the brand stay positive across Europe, whose consumer confidence and unemployment vary widely from country to country, some of which are facing austerity measures.

“It’s an interesting set of markets,” Thompson said. “For our business, we just focus on being able to have value at each menu tier and innovative products, and that we’re there for our consumers from a convenience factor and base value factor.”

While many of the operators in Europe and APMEA are excited to test McCafé Frappes and Real Fruit Smoothies in their markets, the United States likely will explore importing big sellers from abroad, such as the McWraps or premium burgers like the 1955 from Europe.

“We lean on the U.S. for the beverage innovation, and we look to Europe for burger innovation,” Thompson said. “We also see great things out of Asia for chicken and snacking. You’ll see some of those come through in the U.S.”

Operating income grew 19 percent in constant currencies in APMEA. As with competitor Yum! Brands Inc., China will fuel much of the growth in McDonald’s international business in 2011, with 175 to 200 units set to open this year.

Labor costs have inflated slightly in China this year, Bensen said, but much of the wage pressure McDonald’s feels gets offset by being able to sell to more customers with disposable income, and the brand has created value offerings at breakfast, lunch and snack times to capitalize.

“Second-quarter comps were up 14 percent in China, mostly in guest counts,” Bensen said. “Traffic is very strong there, and the key to that in a high inflationary environment is everyday value.”

Value offerings at lunch have helped stabilize sales in Australia, which experienced a dip in its economy, and Japan, where all but 17 of the system’s 3,300 restaurants are back open after March’s earthquake and tsunami.

Bensen added that emerging markets other than China would add units this year: 225 in Europe, 90 in Latin America and 450 in APMEA excluding China — including 100 in Japan, 30 in South Korea, and about 20 in Turkey, the Philippines and Malaysia.

The chain also continues to test more than 750 self-order kiosks in France, and contactless-payment systems currently working in the United Kingdom and Switzerland soon will be rolled out to the brand’s restaurants in Italy and Poland. Nearly 1,700 dessert kiosks are in place across APMEA, driving sales across multiple dayparts and snack times.

Oak Brook, Ill.-based McDonald’s operates or franchises nearly 33,000 restaurants around the world, 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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