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MCD- Grass Roots Southern Style Chicken Biscuit Survey

We have done another proprietary grass roots survey on the state of breakfast product launches. This latest survey focuses on customer reactions to MCD's new Southern Style Chicken Biscuit breakfast sandwich, which was launched in May. We surveyed over 89 MCD locations across the U.S. The following conclusions can be made from the survey data:

(1) The stores generally indicate the new breakfast sandwiches are well received.
(2) Adoption of the Chicken Biscuit in the Northeast appears to be behind other regions.
(3) A few locations indicated confidently that some customers had tried the sandwich because of the promotion offering a free Chicken Biscuit with purchase of a regular drink, but had continued to purchase it after the promotion ended.
(4) The results were mixed as to whether the Chicken Biscuit is bringing in new customers versus cannibalizing other sandwiches.

  • If you would like to learn more about the comments by region, please call for details.
  • COMMENTS THAT STAND OUT:ME: People still like the sausage biscuit, but the chicken is popular also. NH: It is the same people coming in to buy the chicken; they buy other things with it. NH: The chicken has replaced the sausage biscuit on the menu as number 5, they still sell the sausage but it's not promoted now so people are buying the chicken. MA: After they had a promotion where they gave it away with a free drink, people came back to buy it. MA: It is more popular than the sausage right now because they are advertising the chicken so much. MA: Some people find it bland. CT: The chicken started taking off after the promo. CT: They get some people switching over and some new customers coming in for it. NC: Compared to a similar priced item, like maybe the bacon, egg and cheese, the chicken sells pretty well. I think a lot of people prefer the chicken over pork because it is healthier. NC: New people are coming in for the chicken. NC: The sausage is still more popular, it is only $1 whereas the chicken is a little bit more. SC: They sell more sausage than chicken because it is a price point issue. NM: They have run a promotion, so they're pretty popular right now. NM: They sold 75 chicken yesterday...35 cash, 40 with the coupon. They sold 150 sausage biscuits yesterday. TX: They are selling real well. LA: Relative to new people coming in, no, it's just the regulars. UT: They are good. They are popular. The people that are buying the chicken are a mix of new and regulars. UT: She was pretty sure they sell more sausage than chicken. CO: The sausage, egg and cheese is the most popular, but she sees people switching over to the chicken who would have gotten the sausage before. CO: They are running a coupon on the chicken and they are seeing new faces coming in for the chicken. CO: The sausage, Egg Mcmuffin is the most popular. It is $1, which is a price that everyone can afford.

NKE: Loss to the Little Guy

Nike caved-in, allowing 7 of its athletes to wear the controversial Speedo LZR swimsuit if they choose to at the US Olympic trials (Speedo is about 8% of WRC cash flow). This is very un-Nike-like. Those following Nike for a while and can think back to the 1992 Olympics in Barcelona when Jordan draped an American Flag over the Reebok Logo on his uniform as a sign of brand loyalty. Nike is a fierce competitor. It does not like to lose, and it likes its competition even less.

Is Nike getting soft by allowing another brand onto its turf? Not quite. Think about the PR decision tree. Nike got beat on this one. There's no way around that. Now Nike says that it is allowing its athletes to wear competing product without any 11th hr corporate pushback so that its athletes can compete without distractions. If Nike instead were to hold its ground and the athletes lose, then Nike looks bad. If Nike flexes and the athletes win, Nike is the good guy by supporting its athletes. If the athlete loses in a non-Nike product, then that fuels Nike's fire.

Is this the optimal strategy? No. It is Nike playing defense. Nike's never been too good at defense. In fact, when Nike is on defense it just makes them plain 'ol angry. Yes, this could give Speedo a bump in sales over the next quarter (likely not enough to be a financial boost to WRC). But I would not want to be in their suit 12 months out...

MCD Europe - One Price No Longer Fits All

Despite MCD's Europe posting another month of strong same-store sales in May (+9.6%), an article in the Financial Times points to difficult times ahead, stating the company is adjusting its one price fits all
pricing structure in an effort to offset rising commodity costs. According to the article, MCD has hired Revenue Management Solutions, an international consultancy group, to survey how price-sensitive its customers are by specific region so that it can more effectively raise prices without facing customer resistance.

Steve Easterbrook, chief executive of McDonald's U.K. business is cited, We do have to move prices up, we can't just absorb [food] price increases. Our food bill has gone up by 5%-6%. MCD's franchisees have had pricing flexibility for a couple of years now, but this is the first time its company-owned restaurants will not have a uniform pricing structure.

With the company forecasting Europe chicken prices to be up 6%-8%, cheese up 20%-25% and beef up 3%-4%, it is not surprising that MCD will have to raise prices but this change in strategy and the implication that consumers can no longer tolerate a blanket menu price increase is another sign that the consumer environment is becoming more challenging in Europe (following the Eurozone Retail Sales report, which showed a 2.9% decline in European retail sales in April and the Experian Group Ltd's statistic which showed that May shopping in Britain had fallen 1.5% from the prior year and 3.4% from April).

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UA: Impressive Consistency

I am incredibly impressed with the consistency in price point of Under Armour's cross trainers in the weeks since its launch. In fact, a full 7 weeks after launch, average price is hovering at $80, which has hardly budged off of what we saw in the initial week-1 hype, and it is happening without sacrificing any meaningful unit sale momentum. This is highly unusual for most launches in this space. The football cleat, for example, saw a precipitous decline in price point over the first 2 months (from $85 to $64) back in 2006. The x-trainer launch is being handled extremely well by Under Armour management, in my humble opinion.

My issue with this story has never been with the top-line growth, but with the margin necessary to sustain top line growth. I still believe that to be true, and that the real margin level for UA is 1-2pts lower than what we see today (we'll see higher marketing and sourcing costs than anyone is banking on). But I am definitely leaning more towards the camp that better top line could offset some of this in 2H08. Estimates still look too high, but maybe not as high as they looked before the current trends I'm seeing in footwear.

Chart below shows price point for football cleats vs cross trainers in the 7 weeks post-launch for each product. Source: NPD Fashionworld.

Restaurant Anthology - Part 2

For more details regarding any of the following highlights, please refer to this week's relevant postings, which are sorted by date.
  • Institutions appear to be net buyers of SBUX and net sellers of MCD. As I keep saying, Starbucks is now making the right capital allocation decisions (evidenced by the company's announcement to partner with SSP for expansion in key European travel channels - posted June 12) while MCD's results will eventually reflect the stress that is emerging in its franchise system from the unprofitable Dollar menu and broadened beverage platform - posted June 13 (SBUX, MCD).
  • MCD's Europe results have been helped by the strength of the Euro in the last 7 quarters. The spread between reported operating income growth and currency-neutral growth has accelerated recently and the F/X comparisons will become more difficult going forward - posted June 12 (MCD). MCD posted another month of strong comparable sales trends in May, up 7.7% globally. This number was benefited by about 2% from a calendar shift, which will reverse in June. Although the U.S. top-line number looked strong, Dollar menu sales have been driving traffic in the U.S. at the expense of margins (company restaurant margins have been down in the last 5 quarters) - posted June 9 (MCD).
  • After coming across a story on the Dow Jones news wire that said the Xuzhou Construction Machinery Group is going to exit its JV with Caterpillar, I realized I don't know how secure YUM's relationships with its partners in China are because they are essentially state-owned enterprises. Despite having a majority ownership position, YUM historically has not consolidated any entity in China, instead accounting for the unconsolidated affiliate using the equity method of accounting - posted June 11 (YUM).

Restaurant Anthology - Part 1

This week's macro call outs all point, not surprisingly and not new, to rising costs for both restaurant companies and their customers, alike.

For more details regarding any of the following highlights, please refer to this week's relevant postings, which are sorted by date.
  • Despite optimism around this week's reported May retail sales, BIGResearch's Consumer Intentions & Actions Survey, which monitors over 7,500 consumers, refuted this bullishness, reporting that in June, 53.8% of consumers are shopping for things they need rather than want (up 7 points from a year ago). Although meant to jumpstart consumer spending, only 5% of those consumers who have received their economic stimulus checks have put them toward discretionary purchases - posted June 12.
  • Another data point affirming that less than optimistic view of the consumer's purchase outlook was that at $4.00 a gallon, gas is now eating up 85% of every incremental retail dollar (provided by SixthManResearch.com) -posted June 13. These higher gas prices are hurting consumers in certain regions of the U.S. more proportionately than others relative to income levels. The O'Charley's concept, LongHorn Steakhouse, Steak n Shake and Ruby Tuesday are most exposed to these hardest hit areas (based on % of store base) - posted June 11 (CHUX, DRI, SNS, RT).
  • This week's commodity price moves spared coffee and dairy users (i.e. Starbucks) as they were the only commodities on our screen that declined. Coffee prices are down nearly 19% from March peak levels. Corn, wheat and soybeans all moved up substantially again this week, and are more relevant to the restaurant industry at large - posted June 13. The July minimum wage increase will put increased pressure on restaurant margins in the upcoming quarter (3Q08) - posted June 12. Faced with both a tightened consumer and higher costs across the board, restaurants must strike a balance between driving traffic and preserving margins. NPD Group data point to a recent decline in the % of visits on deal (still up YOY) at casual dining restaurants, which should bode well for margins - posted June 9 and 11.