How Long Can MCD Buck the Trend?

Starbucks stated earlier this week that it is experiencing a slow down in the U.K. market, which resulted in a slight traffic decline. CEO Howard Schultz said there are signs in the U.K. that remind him of what happened in the U.S. in the beginning of 2008 and “those signs kind of bode downward in terms of consumer spending.”

Today, Bloomberg reported that according to the Experian Group Ltd., British consumers made fewer visits to retail outlets in July, the third consecutive fall, as fears of an economic decline and rising energy and household bills deterred shoppers. Retail visits fell 2.6% from a year earlier and Experian forecasts sales volumes in the next 12 months will be ``the slowest period since the early 1990s.”
  • McDonald’s management said on its recent 2Q08 earnings call that “even in spite of declining consumer confidence in the U.K., our sales, our guest counts, and our margins continued to grow in the second quarter and were a strong overall contributor to our overall results.”
  • It is important to remember that MCD stated on its 4Q07 conference call back in January that “historically though McDonald's has not been as affected by a slowdown in consumer spending as other retailers because of our everyday affordability.” Although MCD’s U.S. comparable sales have held up relative to other restaurant companies after flattening in December and then turning slightly negative in March, its margins have suffered significantly (down every quarter since 1Q07). MCD’s U.S. margins have been hurt as more of its customers use the Dollar Menu. In 2Q, U.S same-store sales were up 3.4% with guest counts accounting for 75% of the growth. Pricing was up 4%, which implies negative mix or some trading down. MCD’s U.S business has been impacted by the economy and signs of a weakened economy in the U.K. will inevitably emerge in MCD’s Europe results as the U.K., France and Germany account for two-thirds of MCD’s operating income in Europe.