Analyst: Tough year ahead for new McDonald's CEO
Don Thompson became chief executive of McDonald’s Corp. Sunday, and while he currently faces significant headwinds in all three of the company’s major regions of business for the rest of the year, McDonald’s sees a long-term path to recovery, according to a Barclays Capital analyst’s summary of recent meetings with management.
In a research note, Jeffrey Bernstein of Barclays reiterated that McDonald’s would fight off several challenges the rest of the year, including increased competition in the United States, plummeting consumer confidence in Europe, and a slowdown in growth in its Asia/Pacific, Middle East and Africa, or APMEA, division. He said, however, that initiatives in place to combat those pressures may risk comparable-sales growth in the near term but should set McDonald’s up to recover nicely in 2013 and beyond.
“The headwinds are large, though priced-in at current levels,” Bernstein wrote. “McDonald’s is not a 2012 outperformer, though we expect stabilization in the second half of 2012 and 2013.”
Taking rivals’ best shot in U.S.
The chain’s domestic same-store sales grew at slower rates of 3.3 percent in April and 4.4 percent in May, and executives indicated to Bernstein that timing and advertising of certain promotions were mostly to blame. They also acknowledged that other quick-service chains were targeting McDonald’s market share aggressively.
The most obvious example would be Burger King’s rollout of a new menu, which includes several items that have been successful for McDonald’s recently, such as fruit smoothies and snack wraps. However, McDonald’s management also conceded that recent sales lifts at Wendy’s and Taco Bell — the latter driven by extremely robust sales of the Doritos Locos Taco — would threaten its market share if the Golden Arches stood still.
However, Bernstein noted that McDonald’s likely would withstand Burger King due to the size of its marketing fund, which is an estimated five times the size of Burger King’s. Even though Burger King increased its ad spending in April and May to reach the same dollar amount as the McDonald’s marketing budget, neither Bernstein nor McDonald’s executives expect that onslaught to last.
“Management was flattered that Burger King was ‘copying its playbook,’ emphasizing that it could ‘out-gun’ and execute better than any of its peers,” Bernstein wrote, “thanks to a strong franchisee base, a believed better product, a more current asset base and faster speed of service.”
In addition to its perceived marketing advantages, McDonald’s also cited its ongoing reimaging program and product pipeline as ways to re-energize its sales growth in the United States, Bernstein noted.