McDonald’s CEO Steve Easterbrook avoided the Dubya pitfall and refused to prematurely declare victory. He also resisted the temptation to gloat despite a year’s worth of snarky headlines doubting a turnaround and even Wall Street’s wary consensus expectation of only a 2.7% Q4 same-sales gain.
In fact, McDonald’s delivered a 5.7% U.S. increase in Q4 comparable sales—its best performance in nearly four years—thanks to All-Day Breakfast, good weather and, Easterbrook insisted, many less-visible changes in how the company the operates that are improving sales and efficiency. Easterbrook spoke of positive momentum and “upward trajectory” rather than of turnarounds.
He said it would take at least six more months of positive growth before this quarter’s gains could be considered sustainable growth. He also cautioned that 2016 quarterly results “ are not likely to be linear,” due to global economic factors and uneven customer traffic flows in the U.S., Germany and France. U.S. guest counts were up in Q4 but net negative for the year.
A real recovery for the brand will have to rest on more than All-Day Breakfast, he said: “We don’t want this to be a single initiative turnaround plan.” However, the breakfast initiative has performed incredibly well, beyond company expectations in sales and in how long the bump lasted after its introduction. It has meant incremental sales gains by recapturing lost customers and increasing visits from current customers. All-day breakfast “is really a different [meal] occasion,” he said.
Easterbrook defended the decision to do McPick 2 for $2 rather than the $4 meal bundles others are using, saying the choice and flexibility in McDonald’s approach is attractive to the 25% of its customer categorized as “value conscious.” And Mozzarella Sticks have proven to be unexpectedly popular. But McPick is a test and not the final answer: A “permanent” value platform will be introduced later this year.
Other discussion points of note during today’s earnings call:
⇒ CFO Kevin Ozan said McDonald’s Corp. is exploring the possible sale of a portion of its McDonald’s Japan operation. Such a sale would be dependent on identifying the right strategic investor. Japan’s 1.4% Q4 increase in same-store sales was its best report in nearly four years.
⇒ McDonald’s raised prices about 2% in 2015, which Ozan noted was below the 2.5% Consumer Price Index increase for food-away-from-home last year. Easterbrook said the projected overall CPI for food away from home this year is 2.5% to 3.5% and that McDonald’s would seek to not go above that. He said the chain keeps an eye on food-at-home inflation, too, because “food at home is a competitor.”
⇒ The company said that “Operating income for the quarter rose 30%, driven by positive comparable sales and a gain from the strategic sale of a unique restaurant property.” That property is a McDonald’s restaurant at the corner of 34th Street and Tenth Ave. in New York City, which McDonald’s sold for $153 million. The unit will be torn down to make room for the 62-story 50 Hudson Yards development.
⇒ McDonald’s will introduce table service to this year to the one-quarter of its UK restaurants that have been upgraded to the “McDonald’s Experience of the Future” design, which includes kiosk ordering and digital menus.
⇒ Australia will get a national rollout of All-Day Breakfast by the end of this quarter.
⇒ Germany will see a new value program in place shortly in the continuing effort to increase customer traffic there. The October terrorist attack in Paris has dampened the eating-out market in total in France, Easterbrook said.
⇒ Interestingly, while Easterbrook said McDonald’s believes customization—such as the Create Your Taste platform—is important to customers, he conceded that McDonald’s still isn’t certain it knows just how much customization customers truly want.