MCD - EATING MARGINS FOR BREAKFAST

Just about a month ago at its investor meeting, MCD downplayed the media noise around going national in the U.S. with the Dollar Menu at breakfast, saying that it has been used at breakfast in some markets for some time and is, therefore, nothing new.  Specifically, management stated that in the markets where a Dollar Menu was already offered that the results were directionally consistent with Dollar Menu performance during other dayparts.

Today, it is being reported that MCD will launch a national dollar menu in January, supported by advertising across the U.S. I think this national launch was anticipated by investors, which is why there was so much “noise” around the topic prior to MCD’s November meeting.  If management knew in November that it was going to launch the Dollar Menu at breakfast in January, I find it interesting that management tried so hard to downplay the news, saying it was not new.  It may not be new to some markets, but it is new to the balance of the system in the U.S. 

Don Thompson, president of McDonald’s USA, did say during his presentation at the November meeting that we will learn more about core breakfast initiatives in 2010.  Is this national launch of the Dollar Menu part of the breakfast initiatives?  If so, it is new news.  I think MCD would only introduce the Dollar Menu at breakfast if there was a definite need to do so.  Breakfast is MCD’s most profitable daypart and management would only risk decreasing its margins at breakfast if traffic was under real pressure. 

I think management knew such an introduction would be viewed as a sign of increased weakness in same-store sales trends and would possibly dominate much of the Q&A and coverage of the meeting with investors harping on the issue as to why such an introduction is necessary.

The announcement today, however, is less alarming because the investor community has already had the last couple of months to mull over the possibility of a Dollar Menu at breakfast.  And, we already know that comparable sales trends are weak in the U.S. following two months of reported declines.

If management had not come to a decision over whether to nationally launch the Dollar Menu prior to its investor meeting, then traffic trends at breakfast must have deteriorated rather significantly in the past month, making such a move necessary.  Either way, we know comparable sales trends in the U.S. are under pressure and the Dollar Menu at breakfast will put increased pressure on margins.  I would also think that today’s announcement was not a welcomed one by the entire franchisee community because not all incremental traffic counts are created equal from a margin standpoint.  I view this national launch as a desperate move by MCD and a clear indication of the slowdown in business trends.