Takeaway: Whatever Amazon does, customer attrition is critical.
Editor's Note: Below is a brief, complimentary excerpt from Hedgeye Retail analysis. For more information on our services, click here.
- "Amazon.com Inc. is hoping to offer an on-demand music-streaming service to customers of its Amazon Prime program, but it may limit how much a person can listen to any given song, according to people familiar with the matter."
- "The Seattle-based company has held negotiations with record companies and music publishers seeking to license their music for the planned service, but it remains far apart from some record companies on financial terms, these people said."
- "The music service is one of several new features that Amazon may add as it raises the price of Prime to as much as $119 a year."
Takeaway from Hedgeye’s Brian McGough:
Here’s the deal. Amazon’s (AMZN) world continues to revolve around its Prime service in the same way Costco’s membership-only warehouse club revolves around its membership fee. Costco loses money excluding its fee, and Amazon loses money regardless.
Perhaps a boost in customers subscribing to Prime would put Amazon solidly into the black. Because, in truth, $119/year represents a 50% increase from current levels.
But you have to keep your customers. Attrition is critical. Simple as that.
To us, this move just sounds risky.
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Editor's Note: Below is a complimentary research note from Hedgeye Restaurant Sector Head Howard Penney published March 10, 2014 at 12:33 PM. For more information on our services, click here.
The following are quotes from Don Thompson taken directly from the monthly sales press releases. Reading between the lines, the evolution of the language suggests that management still does not have a plan in place to improve same-store sales:
September – management not giving up
"We remain confident in the fundamental strength of the McDonald's System and our ability to connect with customers and deliver the menu choices, value and convenience they expect from McDonald's."
November – management not giving up
"We remain confident in the fundamental strength of the McDonald's System and our ability to drive initiatives that will deliver the greatest benefit for our customers."
December – management begins to waver, as they admit they need to make “investments”
"As consumer expectations and the marketplace continue to evolve, we are making investments in our menu, restaurants and service to strengthen our connection with customers and build our business for long-term profitable growth."
February – management is intent on improving performance
"We are intent on improving our performance by building on our customer-driven strategies and the fundamental strengths of our proven business model."
March – management is now thoughtfully evolving its approach
"We are intent on improving our business performance by thoughtfully evolving our approach to ensure that we are delivering the most compelling value, service and convenience to each of the approximately 70 million customers who choose McDonald's each day."
On a global basis, MCD had a relatively strong May-August sales period. Since then, trends have continued to deteriorate. Since the December sales press release, it has been clear that management is still looking for an answer to evolving consumer expectations. We don’t believe installing high density tables will help solve this problem.
The language in the February release says they are working hard, but there is still no actionable plan in place. After missing numbers yet again, today’s press release suggests that whatever plan they thought they had in place must be reevaluated.
The red lines in the charts below signify a company that is in a secular decline. Europe and APMEA look to be bottoming, but the secular decline in the US is dragging down global numbers.
Until we begin to see these trends improve, we remain bearish on MCD.
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