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How McDonald’s got its groove back

All-day breakfast helps boost first-quarter results, but so do price increases and unit closures

McDonald’s Corp. same-store sales rose 5.4 percent in the U.S. and 6.2 percent worldwide in the first quarter, the company said Friday, continuing the momentum started last year despite an incredibly competitive market.

It’s a far cry from a year ago, when the quick-service giant overhauled its management and recorded nearly $200 million in strategic charges in the first quarter of 2015 as it sought to reverse three years of same-store sales declines.

“We’re in the early stages of the turnaround,” McDonald’s CEO Steve Easterbrook said during the company’s earnings call Friday. “We’re two to three quarters in, but I’m confident enough to say our turnaround is taking hold.”

The momentum came despite improvement in the overall quick-service segment. McDonald’s competitors, including Wendy’s and Burger King, each offered value deals and their own promotions. Yet McDonald’s executives said the chain’s same-store sales in the quarter ended March 31 outpaced the sector by 140 basis points.

Much of the credit has been given to the company’s decision last year to start selling breakfast items after 10:30 a.m.

McDonald's Egg McMuffin
McDonald's now sells a selection of breakfast items, such as its Egg McMuffin, all day. Photo: Justin Sullivan/Getty Images

All-day breakfast was a historic moment for the venerable burger chain. Consumers have long asked McDonald’s to serve its popular breakfast items, like Egg McMuffins and biscuit sandwiches, at lunch and dinner. But concerns about menu complexity kept the company from doing so. 

McDonald’s sales improvement, including 5.7-percent same-store sales growth in the fourth quarter last year in the U.S., coincides with the company’s decision to reverse course and offer a limited selection of breakfast items all day. 

“All-day breakfast continues to provide customers new reasons to visit McDonald’s,” Easterbrook said. He noted that breakfast “fills a price gap on the menu” between low-cost items and its premium sandwiches. Some customers are trading up to Egg McMuffins, but others are adding breakfast items to existing orders. 

“All-day breakfast exceeded our expectations,” Easterbrook said. He added that the platform has “settled,” but even that rate exceeded the company’s expectations.

He added that the company is “looking for ways to extend it in the future in response to customer feedback.” McDonald’s is testing an expanded all-day breakfast menu, beyond the nine items currently available, in a number of markets. 

But all-day breakfast wasn’t the only factor in McDonald’s performance. The company’s new value offer also appeared to give customers a reason to buy food from the chain. McDonald’s introduced its new McPick menu, a flexible platform for multi-item value, in January, starting with a 2-for-$2 offer featuring a McDouble, McChicken, fries and mozzarella sticks. In March, the chain offered premium items on a 2-for-$5 platform. 

Both offers resonated well. A number of operators kept the 2-for-$5 offer going after the national promotion ended, executives said, and the platforms supported good franchisee margins in the period. “We’re not just discounting products at low margins,” Easterbrook said. 

Executives suggested the McPick menu could continue because of its flexibility throughout the year and in different regions. They also noted that value is vital for the chain. “There will always be value at McDonald’s,” Easterbrook said.

Other elements played a role, too. Leap Day gave McDonald’s an extra day in the quarter. In addition, the chain raised prices by 3 percent, so the items consumers ordered simply cost more. And executives acknowledged the role that unit closures played in the chain’s performance. McDonald’s closed 350 locations a year ago, including 220 locations in the U.S. and Canada.

“Our decision to close underperforming restaurants directly contributed to improved financial performance,” Easterbrook said. 

He also stressed that operational improvements are playing a role. McDonald’s has emphasized operations over the past year, including initiatives such as “Ask, Ask, Tell” at the drive thru to ensure order accuracy. Some efforts get deep into details, such as increasing the font size on receipts so staff can see special orders more easily.

At McDonald’s company-owned locations, it boosted the starting pay of its workers to $1 above the minimum wage. The company also started providing tuition assistance through a program called “Archways to Opportunity” that has so far provided tuition to 5,000 employees.

That has resulted in lower crew turnover and improved customer satisfaction scores, Easterbrook said. 

“Customers in the U.S. are noticing a difference,” he said. 

As for where McDonald’s business is coming from, executives said they are focused on their primary quick-service competitors. But they also acknowledged that customers are coming from many different competitors.

“When we get 14,000 restaurants going in the right direction, the customers tend to come from quite a few places,” Easterbrook said. “That’s not surprising. But first, we want to win the QSR segment.”

Contact Jonathan Maze at [email protected]
Follow him on Twitter: @jonathanmaze

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