McDonald's Sales Drop Despite Aggressive Discounting

Cites Frugality Among U.S. Consumers

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McDonald's reported disappointing sales for the first quarter, citing difficult prior year comparisons, intense competition and frugal consumers.

The chain's global comparable sales decreased 1.0%, while U.S. same-store sales dropped 1.2%. Its Asia-Pacific, Middle East and Africa segment reported a drop of 3.3%, primarily due to negative sales results in China, and sales in Europe were down 1.1%. Income for the quarter was relatively flat at $1.27 billion.

"While not unexpected, we're not satisfied with our first quarter results," said CEO Don Thompson during an earnings call Friday, calling out as obstacles softer retail sales in the U.S. and the Avian flu concerns in China. "The challenging economic environment [in] which we are operating impacted our first-quarter results. While there are mixed signs of a slow recovery in the U.S., significant headwinds persist as consumer confidence continues to waver."

McDonald's is banking on the McWrap to boost sales and compete directly with Subway.
McDonald's is banking on the McWrap to boost sales and compete directly with Subway.

While McDonald's has been faring relatively well for years, its sales have been decelerating since February 2012. McDonald's has been reeling since it in October reported its first global sales decline in nine years, which included a 2.2% drop in monthly sales in the U.S. McDonald's, like many other fast-food chains, had an uphill battle for the first quarter because last year's winter was unusually mild, bringing more customers. Mr. Thompson, while noting that the weather has impacted the company's sales, said that he does not want to use weather as an excuse moving forward.

Mr. Thompson also said that the chain "[continues] to complement dollar menu value moves with a focus on core favorites and innovative new products." The chain began heavily promoting its dollar menu late last year after it rearranged its marketing calendar. That will continue in 2013.

After the sales drop in October, McDonald's also it urged its franchisees to consider staying open on Thanksgiving and Christmas, a move first reported by Ad Age. Despite the drop, McDonald's posted a 3.3% increase in U.S. sales for the year 2012, and a global increase of 3.1%.

The aggressive discounting has led to some unrest among its franchisees, who are concerned that continual dollar-menu promotion and discounting of products will eat away at their profits. The chain earlier this month launched its biggest product of the year, the McWrap, which McDonald's is banking on resonating with millennials and helping the brand compete directly with Subway. According to a recent survey, franchisees were upset because they said McDonald's corporate wanted them to promote the McWrap for a brief period for a dollar, and that a $2 promotion was settled upon. The product's regular price is $3.99.

"We feel that the performance at these early stages in the U.S. has met the expectation that we have," said Mr. Thompson, noting that the company is hedging its bets on the performance of the McWrap because "we're facing a slow recovery in the United States from an overall economic perspective.

Mr. Thompson noted that a $2 promotion for the McWrap is temporary -- an effort to generate interest and get customers in the stores to try it -- and that the product will be sold at full price. As for when the discount promotions end, he said, "While we may not get the same unit movement, we will have a little bit better margin on that product so these are all the things that will help us as we continue to manage both margins and also sales success without having guest count erosion."

He also said that McDonald's in the U.S. outperformed its competitive set and increased market share, and noted that the McWraps, marketed as a premium product, is a platform for McDonald's in the U.S. -- meaning that the chain will likely offer similar products in the future. He touted the virtues of its new Egg White Delight, an egg-white breakfast sandwich that's 250 calories as opposed to 300 for its Egg McMuffin, as well as a new blueberry pomegranate smoothie. He also hinted that in the latter half of the year the chain will have some new products related to beef.

Mr. Thompson noted that the company expects April's global comparable sales to be slightly negative.

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