Nomura Sees McD’s Comp Sales Fading

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From burgerbusiness.com, by admin
Nomura Sees McD’s Comp Sales Fading

Nomura restaurant analyst Mark Kalinowski maintains both his Neutral rating of McDonald’s Corp. stock and his forecast for the chain’s Q2 same-store sales, which will be reported next week. But Q3 and Q4 likely will be more difficult, and the Grand Mac and Mac Jr. burgers aren’t likely to go national before early 2017, according to Kalinowski’s latest research report.

He looks for McDonald’s same-store sales to be +2.4%, which less than the Street’s consensus of +3.3%. For Q3 he sees comp-sales growth slowing to +1.8% and to turn red in Q4 at -1% as McDonald’s laps 2015’ss Q4 when All Day Breakfast sharply boosted sales.

Kalinowski’s latest survey of a small group of franchisees yields the usual mix of responses, both critical of and satisfied with sales and management’s strategies. He queried 27 domestic franchisees who operate a total of 199 stores. He says these operators’ Q2 sales were up 2.4%, with restaurants in the West outperforming (+5.2%) other regions. Franchisees in the South surveyed by Kalinowski reported flat Q2 same-store sales.

Operators expect the coming expansion of the All Day Breakfast menu to provide at least a short-term sales boost.

Operators expect the coming expansion of the All Day Breakfast menu to provide at least a short-term sales boost.

Kalinowski concedes these 27 franchisees’ opinions “may or may not be representative of the U.S. franchise base in general” and their comments should be weighed in that light. But their opinions need not be ignored. A few franchisees surveyed expressed concern that sales growth was coming more from price increases than from traffic gains. One operator’s assessment was, “We are starting to lap some of our price increases and All Day Breakfast has kind of faded.” Said another, “Competing against weak sales last year but not really adding any sales beyond price increases.”

Earlier this month, McDonald’s announced that the All Day Breakfast menu would grow to 15 items by September with the addition of both biscuit and muffin sandwiches all day plus McGriddles 24/7. Remarked one of the 27 operators surveyed, “Corporate will launch All Day Breakfast 2.0, which will be followed up with $$$$$$ advertising, so we will get a bump in sales again but not so much profit.” Echoed another, “All Day Breakfast 2.0 will give us a small, temporary boost in Q3.”

Asked what the positive aspects of possibly using fresh ground beef, which it is testing in Dallas/Fort Worth, most of these operators said the benefits would be in perception. “Many customers perceive unfrozen to be better for you,” said one. “Perception is everything.”

Operators see a perception gain, but not necessarily a sales gain, from the potential switch back to fresh ground beef.

Operators see a perception gain, but not necessarily a sales gain, from the potential switch back to fresh ground beef.

As for such a move’s potential drawbacks, several cited food-safety issues inherent in using fresh product. Others see “more operation complexity.” Another said he sees “Massive learning curve for our managers and crew. No doubt the biggest change in McDonald’s history. Would be huge distraction from our ‘turnaround.’”

McDonald’s may now be touting “The Simpler the Better” as its food philosophy, but several operators voiced unhappiness about what they see as McDonald’s inability to stick to its vow to simplify the menu. Said one (with Kalinowski’s explanatory note in brackets): “Out of one side of our mouth we talk about simplification and out of the other side we are talking about adding a third meat patty (6-1). Are we delusional?” [Note: 6-1 refers to six patties to a pound. Right now McDonald’s U.S. uses the Quarter Pound patty—four to a pound or 4-1—and the patty used for Big Macs, the hamburger and the cheeseburger (are) 10 to a pound or 10-1. The 6-1 patty is in test in Columbus, Ohio and the Dallas/Fort worth area of Texas as part of the Grand Mac and Mac Jr. test. These test items apparently have a chance of going national early in 2017.]

One operator criticized regional McPick discounting, saying, “Regions continue to push cheap discounts to bolster their scorecards. They do this knowing perfectly well it has hurt our brand perception but still remain convinced that selling cheap products is a requirement for the industry.”

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Leading “meal kit” brand Blue Apron may recently have been valued at $2 billion but The NPD Group says this category may be more buzz than revolution right now. “Trial of meal kits is still relatively low with 3% of the U.S. adult population (18 and older) trying a meal kit delivery service within the last year,” the researcher reports.

Those who use the home-delivered meal kits (which provide ingredients and preparation instructions) cite time savings as the primary benefit. Users may gain extra phone-staring time but they aren’t necessarily saving money. NPD says the average in-home meal costs $4 per person, while meal kit meals average $10 per diner.

However, that cost model makes the meal kits competitive with restaurant meals and makes them real—if fledgling—competition for operators, making development of home-delivery capabilities even more important for many concepts.

Blue Apron Meal