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"Close only counts in horseshoes and hand grenades!"

-Tom Tobin, Hedgeye Managing Director of Healthcare.

I made a significant call in January that MCD beverage strategy is hurting its core business.  While my view has played out at times in 2011, defending the thesis in April/May was a challenge to say the least!

The most telling sign of the current state of the sales trends at McDonald’s in the U.S. come from comparing May and April press releases.  My perspective, as a reminder, is that MCD has taken its beverage strategy too far.  The company’s focus on “beverages over burgers” is not a sustainable long-term strategy and this had led to problem in the company’s core business of selling burgers and fries.  Observe the comparison below; a mention of core products in the May sales press release is conspicuous by its absence.

From the May press release: “U.S. comparable sales increased 2.4% for the month. The national launch of Frozen Strawberry Lemonade, the popularity of Fruit & Maple Oatmeal and the continued demand for McDonald's signature beverage and core offerings were key contributors for the month.”

From the April press release: “In the U.S., April comparable sales rose 4.0% fueled by the popularity of the McCafé beverage line-up, including the recently introduced McCafé shakes, McDonald's market-leading breakfast menu, and featured core products including the Big Mac and Quarter Pounder with Cheese.”

I would make the following observations:

  • No mention of McCafé in May
  • No mention about core food products served at lunch
  • Fruit & Maple Oatmeal? How are the 2 for 1 Egg McMuffin trends doing?
  • Frozen Strawberry Lemonade; these are attracting new customers because you can get for $1.

MCD USA posted a 2.4% same-store sales for May (May two-year numbers declined by 100 basis points), while running an estimated price increase of 2%.  I’m not so sure that McDonald’s can still claim that guest’s counts are growing at about the same rate as sales.  If guest counts are still rising, it’s only because of the company’s focus on marketing drinks and deserts.  Therefore, the average check continues to decline, and this will become only more pronounced with the entire domestic system possibly offering "any drink for $1.00" this summer.  My bottom line (and this month provides some evidence) is that McDonald’s core business is declining.

MCD - HORSESHOES AND HAND GRENADES - MCD US May

Even more disappointing in May was Europe.  May comparable sales increase 2.3% driven by strong performance in France, Russia and the U.K., partially offset by the most important market - Germany! As opposed to the USA, the company is citing its core food products as having driven increased sales.  As the company noted, “Key contributors to Europe's May results included premium menu offerings such as McWraps and the 1955 burger, limited-time food events like the U.K.'s Great Tastes of America campaign”

MCD - HORSESHOES AND HAND GRENADES - MCD Europe May

Comparable sales rose 4.3% in APMEA, implying a decline in two-year average trends of 115 bps.  According to the press release, “Compelling breakfast and lunch value offerings, convenience initiatives such as drive-thru, delivery and extended operating hours, and unique promotional tie-ins were the leading sales drivers for the segment in May.”

MCD - HORSESHOES AND HAND GRENADES - MCD APMEA May

Howard Penney

Managing Director