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McDonalds is certainly not afraid of competition and some news items over the past couple of days underscore this fact.  However, if you were an executive from MCD - the world quick service leader - and you were listening to YUM's presentation last week, you would have been embarrassed at YUM's dominance in the Chinese market.  MCD is now moving into China more aggressively, seemingly picking a fight with YUM as it has with some other competitors this year. 

MCD has outperformed its competitors on a top-line basis by providing compelling value and also offering innovative product which drives incremental sales.  Often this involves stepping into the domain of competitors but MCD has done this with some success of late.

  • Frappes and smoothies were a homerun for MCD during the summer months and were a significant reason why the rest of QSR struggled to keep up in 3Q
  • As I wrote in a note entitled “CMG: IN MCD’S CROSSHAIRS?” in September, MCD has been testing a larger burrito-like version of its Chicken Snack Wrap which could take share from CMG as a more affordable alternative
  • News emerging last night of MCD’s increasing growth in China by 40% next year.  YUM has a formidable system established in China but MCD clearly is seeking a share of the growth that YUM is touting in China
  • This morning news hit the tape that MCD will launch delivery on a trial basis in Tokyo and expand if the test succeeds.  The service will initially be rolled out in Japan.  Globally, McDonalds delivers in just 18 countries and this could indicate the beginning of a broader expansion.  YUM highlighted the success of their delivery service in China during their recent Analyst Day in New York.

This past month MCD's same-store sales growth held up in the U.S. but trends slowed in Europe and seemingly fell off a cliff in APMEA.  I think it is only a matter of time before trends slow in the U.S. as well, particularly as comparisons get more difficult come March 2011.  While we are refining the model it continues to look like MCD could fall out of "Nirvana" (same-store sales positive and margins expanding) in 1Q11, for the first time since 1Q09.

So far in December, MCD's USA same-store sales have slowed sequentially from the levels seen in November.


Howard Penney

Managing Director