Is This McDonald’s New Normal?http://www.fool.com/investing/general/2012/11/08/is-this-mcdonalds-new-normal.aspx Demitri Kalogeropoulos
November 9, 2012
The undisputed king of fast food isn't looking so regal these days.
McDonald's (NYSE: MCD ) golden arches have taken on a bit of a double meaning. To customers, they project a clear message: stop here for affordable, convenient food. To investors, the message has been just as enticing: invest here for strong growth and consistent profits.
But those consistently high returns don't look like such a lock right now. McDonald's saw "broad based softness" last quarter, and pointed to big headwinds that hurt revenue and profitability at the fast food juggernaut. CEO Don Thompson called the tough operating environment "a new normal," suggesting that investors could be in for more pain ahead.
How we got here
McDonald's sales growth has also been impressive, until just recently. Comparable sales for the fast food king were up about 4% in 2009, 5% in 2012, and nearly 6% last year. The company's high-low strategy -- of offering compelling value items paired with a strong range of premium options -- has been working like a charm. Customers might come in for the cheap Chicken McNuggets, but they tend to splurge on a McCafe drink, too. The result has been balanced growth, with contributions from both average check increases and higher traffic levels.
Yet, the last few quarters have shown an unhappy trend of falling sales growth. Here are the company's last four quarters of sales:
And the trend hasn't stopped there. McDonald's gave investors an unwelcomed peek of Q4 so far, saying that, "October's global comparable sales are currently trending negative."
Where we're headed
First, consumers are increasingly value-conscious, leaving McDonald's little room to raise prices and benefit from those increasing margins. In fact, the trend's been cutting in the opposite direction, with operating profit down 1.3 percentage points, thanks to the focus on heavy promotion of value op