'Recession-Resistant' McD's Forges Ahead With Menu, Store Changes

Fast Feeder Reports Healthy Earnings, but Acknowledges 'Interesting Times' for Franchisees

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CHICAGO (AdAge.com) -- McDonald's Corp. CEO Jim Skinner took great care during an earnings call today to paint his company as recession-resistant and tout its franchisees' access to credit.
Jim Skinner
Jim Skinner

"There's no denying that these are interesting times to be doing business," Mr. Skinner said, adding that McDonald's business is still growing and "we continue to be recession-resistant." The company reported third-quarter earnings of $1.2 billion, up from $1.1 billion a year ago. Same-store sales in the U.S. were up 4.7% with chicken, breakfast and beverages the key sales drivers.

Trouble spots
Even so, the company is not immune to inflation and rising commodity costs, which have made its value-menu platform and its top-selling double cheeseburger a difficult business proposition for some franchisees. Mr. Skinner said that in the U.S., McDonald's is working with franchisees to solve profitability issues with the double cheeseburger, which has been selling for a dollar in most markets since 2002. The chain has been testing the double cheeseburger at higher prices and with one piece of cheese, instead of the usual two. "We expect to have a decision soon," he said.

Whatever changes are made, there will still be a "dollar menu," said Chief Operating Officer Ralph Alvarez. "We advertised it heavily in September," he said. "We wouldn't have done that if we were going to be walking away from it." But Mr. Skinner said that, from a promotional point of view, "we've got to be much more careful on balancing driving traffic while maintaining margins." The goal, he said, is "still having a very strong branded-affordability menu, but what sits on that menu will look different than now because it has to be profitable."

Franchisee profitability has been under a microscope of late, as the corporation pushes operators to make $100,000 renovations to each store. "[For] operators, being just slightly up on cash flow does not meet their expectations when they're doing the investments they're doing, and we've been aggressive on investments, whether it's been re-imaging or rebuilds," Mr. Alvarez said. "So commodity costs is one of those items that, because we don't control it -- and obviously operators don't, either -- [results in] a sense of frustration, and that's what you end up hearing and rightly so."

Coffee bars installed
Mr. Skinner emphasized that franchisees have sufficient access to credit and that the company's coffee rollout remains on track for completion in mid-2009. There are now 3,800 restaurants with a specialty coffee bar in place, up from 2,500 just a month ago.

"Our franchisees are still able to get the financing they need," he said. "Our expansive network of national, regional and local vendors coupled with McDonald's financial strength and reputation ensures ongoing access to credit. Although processing may take a little longer and costs may be a bit higher, this is the current reality for all borrowers today."

Chief Financial Officer Pete Bensen said McDonald's industry-leading credit rating is enabling the chain to "seize opportunities when others can't." He asked investors to think about the task of remodeling a kitchen, and then multiply that by 14,000. Each location is undergoing a planning, permitting and drawing phase prior to construction, and Mr. Bensen estimated than 10,000 U.S. restaurants have reached that level of completion.
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