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McDonald’s works to close gap with competitors

McDonald’s works to close gap with competitors

Sales are improving and investors are cheering, but executives say they have a way to go

Investors cheered McDonald’s Corp.’s third-quarter earnings report Thursday, bidding the company’s stock to an all-time high after its first positive domestic sales result in two years.

But McDonald’s executives stressed during an earnings call that it is just a single quarter, and that they must still fill a gap with competitors.

“Clearly, for a turnaround, you want sustained growth,” McDonald’s CEO Steve Easterbrook said. “So far we’ve delivered one quarter. This is one data point.”

Indeed, traffic fell in the U.S. during the quarter, even as the chain’s traffic increased everywhere else in the world.

Kevin Ozan, McDonald’s chief financial officer, noted that the chain’s sales results in the U.S. — a 0.9-percent increase — were still 3.2 percentage points behind its immediate quick-service sandwich competitors.

That gap was narrower than it was earlier in the year. “We have been seeing a few recent weeks in which we were (outperforming) the competition,” Ozan noted.

Still, investors have been anticipating a McDonald’s turnaround for weeks. Entering Thursday, the company’s stock was up more than 9 percent on the year, while all of its quick-service competitors’ stocks were flat or down.

McDonald’s also received considerable buzz for its decision to start serving a limited selection of popular breakfast items all day, a move that is expected to drive sales in the fourth quarter.

After the report, McDonald’s stock surged more than 7 percent, to nearly $111 per share at one point, an all-time high.

Executives suggested that a multitude of efforts are helping to lift sales, and should continue to boost sales in the fourth quarter, which are expected to be positive largely due to its all-day breakfast.

McDonald’s introduced a new Buttermilk Crispy Chicken sandwich that performed well in the quarter. Additionally, the company said that improvements to the Egg McMuffin generated strong sales of the item. McDonald’s returned to its original English muffin for the sandwich and switched from margarine to butter.

Food improvements will remain key for the chain going forward, executives said. That includes changes in the way McDonald’s toasts buns for its sandwiches, and in how it sears burger patties to make “hotter, juicier sandwiches,” Easterbrook said.

“We’re enhancing the taste of our products and improving consumer perceptions of quality,” Easterbrook said.  

Easterbrook also discussed company operations at length. While McDonald’s added all-day breakfast items, it also removed an average seven items from its menu. Many markets eliminated Premium McWraps, which operators have long complained are too complex and don’t sell well enough. Those efforts helped improve speed of service slightly in the period, he said.

The company has also implemented strategies to improve order accuracy, Easterbrook said. That includes an “Ask, Ask, Tell” policy, in which drive-thru workers are asked to repeatedly verify orders to improve accuracy. Easterbrook said McDonald’s biggest improvement has been in accuracy.

“Given that 70 percent of our orders come through the drive thru, accuracy is particularly important,” he said.

Technology could be used in the future to further improve accuracy and ensure that orders are correct, Easterbrook said, hinting that more kiosks could come to ensure accuracy and give customers control over ordering.

McDonald’s recently released mobile app could also help along those lines. The app has been downloaded 2 million times, and 1.5 million offers have been redeemed thus far.

Executives said the next frontier is long-term value. Over the summer, McDonald’s offered a Double Cheeseburger and small fries for $2.50, a deal that executives said performed better as the season went on.

McDonald’s is now working on a Pick 2 promotion in which customers can pick from among a selection of sandwiches and sides, including McChicken, McDouble, small fries and mozzarella sticks, for $2. The promotion is up for franchisee vote, Nation’s Restaurant News reported this week.

Executives didn’t discuss the Pick 2 proposal, but they said long-term value remains an important solution for McDonald’s to maintain sales momentum.

“One of the areas where we’re still a little weaker is that entry-level value level,” Easterbrook said. “The top line is going into positive territory, no question. But the ultimate measure of success is getting customers to come in more often.”

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

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