McDonald's Credits Menu Items for Strong Earnings

Same-Store Sales up 5%; Details Marketing Spending Behind National Coffee Bar Rollout

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CHICAGO (AdAge.com) -- Despite commodity cost pressures, price-sensitive consumers and soaring unemployment, McDonald's reported impressive fourth-quarter and full-year earnings this morning.

The Oak Brook, Ill.-based burger chain reported same-store sales were up 5% in the U.S. during the fourth quarter, and up 4% for the year. It credited its breakfast, chicken, value and beverage items with continued strong sales. Full-year profit actually fell 23%, because of a tax benefit last year.

"We serve customers when and where they want McDonald's, and we provide value across the entire menu," McDonald's CEO Jim Skinner said during the company's investor call. "This remains a significant, predictable and attractive brand differentiation that is critical when consumers are feeling the pinch almost everywhere else in their daily lives."

"While we clearly prefer a more robust environment, today's market conditions play to our strengths; in fact our global comparable sales continue to be strong in January," added Mr. Skinner.

Best in the category?
The company's earnings beat Wall Street's view, and December same-store sales were at least in line with expectations. UBS analyst David Palmer predicted that by the time other companies have reported quarterly results, McDonald's will have posted the best results in the consumer category.

McDonald's is now selling McCafe espresso-based beverages in about 7,000 U.S. locations, approximately half its total locations. Company executives are holding a firm line on having coffee bars in most all of its restaurants by mid-year, when it will begin national broadcast advertising. Ralph Alvarez, president and chief operating officer, said that McCafe advertising will come out of the chain's breakfast ad budget. Other pieces of the marketing budget will not be affected or even pulled from, he said.

"We're very sensitive to make sure our core advertising stays strong," Mr. Alvarez said. "The beverage strategy is very much about coffee, which is very much about breakfast, which is a big piece of the business benefit. When we can talk coffee -- as we have over last couple of years with drip coffee -- that has a corresponding positive effect on breakfast."

Falling costs
The breakfast ad budget has been estimated to be in the nine-figure range, but McDonald's does not confirm those details. Mr. Alvarez added that the company hasn't needed to boost its ad budget for its biggest product rollout since adding breakfast in the 1970s because costs have fallen as other advertisers pulled back.

"Because of what's happening in the media markets and other advertisers that are not as prominent anymore ... we have been able to improve our buying efficiency and expect that to continue through '09," said Mr. Alvarez.

When the chain completes the McCafe rollout this summer, it will begin adding smoothies, frappes and bottled beverages to its 14,000 U.S. restaurants.

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