McDonald's: Technology, menu optimization key in near term

McDonald’s will focus on modernizing restaurants, evolving the menu and engineering value

Even as consumer confidence stagnates domestically and in Europe, McDonald’s will focus on modernizing restaurants, evolving the menu and engineering value, said Don Thompson, the company’s president and chief operating officer, in an earnings call on Friday.

McDonald’s net income rose 5 percent and same-store sales increased 7.3 percent for the quarter, and the brand gained market share in the United States and abroad, according to the company's first-quarter earnings report.

The call marked a transition from McDonald’s Corp. chief executive Jim Skinner, who will retire June 30, to incoming leader Thompson, but both executives stressed that the company’s strategy going forward would remain as focused as ever on the brand’s Plan to Win.

Asked what he thought his legacy would be after taking over for Skinner, Thompson responded that he would preach fundamentals just like Skinner. Thompson gave a few hints toward McDonald’s near-term strategy.

“When we talk about modernizing the customer experience, technology will play a big role in that, and so will the new look of McDonald’s,” he said. “When we talk about optimizing the menu, we’ll be more focused on nutrition-based products, as well as our core items and premium products like those coming out of Europe. We’ve proven that we can scale products and learn from our other areas of the world, and we’ll do that at an accelerated pace.”

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In the U.S., ‘business as usual’

One recent example of that global collaboration, the Chicken McBites limited-time offer, contributed to the domestic system’s 8.9-percent increase in same-store sales, executives said. The item was developed in Australia and first was a promotional product in Europe.

An extra operating day in February and favorable winter weather also helped boost same-store sales, executives noted.

McDonald’s other menu move in the United States meant to have a longer-term impact was the rollout of the Extra Value Menu, a new tier on the chain’s menu boards grouping items that already were priced between the Dollar Menu and Extra Value Meals.

“As we look at commodity pressures, there are aspects of the Dollar Menu that are tougher relative to cash flow for franchisees,” Thompson said. “With the new menu, we bring some products down to the lower level of price, like the 20-piece Chicken McNuggets at $4.99, which is compelling to customers. But it will also highlight products like Snack Wraps, which are much more accretive to margins. We’ll rotate some products in and some out, but we need value across the board.”

Analysts brought up the new menu at Burger King and fledgling sales recovery at Taco Bell, but Skinner noted that McDonald’s continued to take market share amid that competition and could withstand whatever rivals planned to dish out.

“Regarding Burger King and Taco Bell, of course we keep a close eye on them, but it’s not our first rodeo regarding this,” Skinner said. “They have spurts of enthusiasm for their brand, and they’re doing some meaningful things, but it’s still business as usual for us. We’re optimizing our menu and improving our relevance and accessibility, and we expect to maintain our competitive differentiation.”

Skinner added that McDonald’s has not changed its strategies around affordability and menu development in the United States because unemployment and consumer confidence have yet to improve dramatically.

The chain still plans to increase its investments in 2012 to improve traffic and throughput, which would allow for more locations to leverage multiple ordering points, such as dual-lane drive-thrus and taking orders on handheld devices.

Given the brand’s current pace of reimaging, it could exceed 800 domestic remodels in 2012, Thompson said. Chief financial officer Pete Bensen added that remodeled locations open longer than 12 months still show same-store sales increases at the high end of the 6-percent-to-7-percent range that McDonald’s projected for the reimaging program.

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