McDonald’s Renewed Focus On Value And Service: Will It Pay Off?

“I didn’t invent the hamburger. I just took it more seriously than anyone else…We take the hamburger business more seriously than anyone else.” — Ray Croc

McDonald’s Renewed Focus On Value And Service: Will It Pay Off?

McDonald’s Corporation (NYSE:MCD) is the leading global food service retailer serving approximately 69 million people in 119 countries every day. It has more than 34,480 restaurant locations. Its brand recognition and diverse geographical footprint positions the chain as a high quality company with stable earnings.

However, McDonald’s Corporation (NYSE:MCD) margins are coming under pressure as the company is emphasizing its value menu attempting to reverse a decline in sales. CEO Don Thompson warned that the company’s profit growth will be tempered in 2013 as the chain reduces margins to better reach cost conscious consumers. McDonald’s sales at locations open 13 months or less have improved since the value menu was heavily promoted since January.

Competitors such as Burger King Worldwide Inc (NYSE:BKW), The Wendy’s Co (NASDAQ:WEN), and Yum! Brands, Inc. (NYSE:YUM) (e.g. Taco Bell, KFC) are following a similar value strategy and also offering higher profit items such as coffee drinks, salads, and smoothies. Wendy’s has launched a “Right Price, Right Size” menu and Burger King temporarily lowered the price of the Whopper Jr. to $1.29. YUM emphasized its value menu and promoted a cheaper version of its combination menus at Taco Bell locations. Additionally, it introduced temporarily reduced prices at its Taco Bell stores for drinks and snack wraps.

Burger King Worldwide Inc (NYSE:BKW) and The Wendy’s Co (NASDAQ:WEN), like McDonald’s Corporation (NYSE:MCD), sent coupons to households attempting to drive traffic. Burger King said last week that it expects global same store sales to decline 1.5 percent in the first quarter. While the fall was larger than analysts expected, Burger King said its sales increased in March showing the positive impact of its value efforts. Burger King also estimates EPS to be $0.17, a 45 percent increase relative to last year.

Yum! Brands, Inc. (NYSE:YUM) EPS is estimated by Wall Street analysts to be $0.61 for the quarter ended on March 2013. Same store sales have declined 13 percent in China last month due to lower traffic at KFC stores driven by fears of Avian Flu. China is an increasingly important revenue driver for YUM as it comprises 42 percent of its revenues. The company is expected to report earnings on April 23. Wendy’s EPS estimates are $0.03 per share and earnings will come out on May 8.

McDonald’s Corporation (NYSE:MCD) is expected to report an increase in first quarter profit on Friday, April 19. Analysts, on average, estimate McDonald’s Corporation (NYSE:MCD) first-quarter same store sales will be down 1 percent globally, and that revenue will rise 1 percent, according to Thomson Reuters. Analysts expect EPS to be $1.26.

Consumer finances are fragile given low levels of employment, high gas prices, and a higher tax bite due to the end of the payroll tax break. Such fragility may not bode well for McDonald’s Corporation (NYSE:MCD) and other fast food chains’ sales and margin outlook for the next quarters.


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