Analyst: Tough year ahead for new McDonald's CEO


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He wrote that franchisee interest in the remodeling program remains high and is working for McDonald’s at the current pace of about 1,000 restaurants per year. About 40 percent of the brand’s 14,000-plus restaurants in the United States have updated interiors, while about 25 percent have refreshed exteriors, at an average cost of about $600,000 — with McDonald’s Corp. contributing about $200,000 to franchisees for reimaging.

Overall, remodeled restaurants generate a 6-percent to 7-percent lift in comparable sales over time, off a base average unit volume of $2.7 million, Bernstein noted.

“Outside of reimaging, management noted that beverage equipment was the last major product platform investment that the franchisees had made,” he wrote. “Another large investment would not be needed for at least a few years.”

As such, McDonald’s menu focus would not include launching entirely new platforms, like the successful introduction a few years ago of McCafe beverages, but rather would aim for incrementally improving current offerings. “Management remains ‘very confident’ about its product pipeline, though the focus has shifted in recent times to extending existing menu platforms and changing customer perceptions of products,” Bernstein wrote.

An upcoming promotion would be a “Favorites Under 400 Calories” menu, similar to an earlier “Wholesome Choices” promotion at breakfast.

“Interestingly,” Bernstein wrote, “management noted no impact from menu- and calorie-labeling laws passed in certain cities and local regions. In some cases, the effect has been positive, as customers realize that certain items on the menu aren’t as unhealthy as initially believed.”

Breakfast remains strong and lunch sales are picking up, management said, and getting more of the system up to 24-hour service would be a priority.

Europe austere, but strategy clear

McDonald’s four major markets in Europe — the United Kingdom, France, Germany and Russia — drive 75 percent of the continent’s operating profits and have produced a mixed bag lately. The United Kingdom and Russia have shown resilient sales, while Germany and France have slowed their growth and the rest of Europe shows severe challenges ahead, particularly Spain and Italy.

The company will focus on consistent value offerings to maintain customer counts during a time of austerity and strained consumer confidence, knowing it would have to sacrifice its margins and average check in the near term, Bernstein wrote.

Currently, the core European quick-service consumer in the 18-to-34-year-old demographic is shopping around many restaurant chains and is more loyal to a low price point than to one brand, management indicated. If McDonald’s could drive traffic now with compelling value offers and maintain it, executives noted, its European restaurants would benefit in the long run when confidence and stability return across the continent.

“Over time, the consumer recognizes that the value platform is a permanent menu addition and reverts back to their more traditional (and often higher-priced) menu favorites, while using the value platform for add-ons to the order,” Bernstein wrote, summarizing McDonald’s strategy. “The question remains how long does it last before that reversion occurs. The best guess is at least one to two quarters.”

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