When McDonald's (NYSE:MCD) updated its performance in the wake of the coronavirus pandemic and released first-quarter comparable sales results, the figures weren't as disastrous as might have been expected considering the dramatic downturn suffered in March.
The restaurant operator was actually able to eke out a 0.1% gain in comps at its U.S. locations for the quarter, even though same store sales were down 3.4% globally. The reason the results weren't so bad, despite the pandemic spreading around the world with greater intensity, was because the fast food giant was still able to report strong sales in all markets in January and February.
It was only after COVID-19, the disease caused by the coronavirus, was declared a pandemic in March that McDonald's business fell off the table.
President and CEO Chris Kempczinski said in a statement, "This unprecedented situation is changing the world we live in, and we will need to adapt to a new reality in its aftermath." It may not be so easy.
A global catastrophe
While customers in the U.S. may take for granted McDonald's broad array of food-buying options still available during these restrictive times, including drive-thru, takeout, and delivery, that's not the case elsewhere in the world.
Asia, Australia, Canada, Europe, and Russia are all suffering from constrained operations, with limited availability of those ordering options. Worse, all restaurants in France, Italy, Spain, and the U.K. are completely closed to control the spread of COVID-19. Those restaurants were some of its best performers.
Last quarter, France delivered its fifth straight quarter of comps growth, while the U.K. notched a remarkable 55 consecutive quarters of growth.
Yet even here in the U.S., which is McDonald's biggest and most developed market where 99% of its restaurants remain operational, there is good reason to believe the situation is going to become much worse for McDonald's going forward.
The most important business crippled
Shelter-in-place orders and the closure of all but essential businesses mean the traditional morning commute has been completely upended. That will be devastating to McDonald's business.
Although drive-thru accounts for around 70% of the fast-food leader's sales, the breakfast daypart has been its most important, accounting for 25% of sales and as much as 40% of profits. The company acknowledges mornings were going to be critical to its success, noting the daypart was the only segment experiencing traffic growth in the industry.
As Kempczinski told analysts back in January, "We have to win at breakfast."
But it was already facing more intense competition for morning customers from established rivals, which caused McDonald's to suffer a decline in traffic during the morning daypart due to rising competition. For example, Wendy's (NASDAQ:WEN) was going to roll out its breakfast menu to a national audience last month. That fast-food restaurant chain believes breakfast can account for as much as 10% of its revenue, though admittedly that has now been postponed.
The worst is yet to come
Yet without huge swaths of the public stopping in on their way to work in the morning, and more competition fighting over a much smaller pie, McDonald's is going to take a big hit to the top and bottom line.
Certainly, other chains that rely upon breakfast, such as Dunkin Brands and IHOP, will similarly feel the effects of the pandemic. Most companies have pulled their guidance for the coming year as a result, but as the largest fast-food restaurant operator with 14,000 locations in the U.S., McDonald's will suffer more acutely than most.
The first quarter may have been better than many expected, but now that we're in a full-blown health crisis, the Golden Arches will end up very tarnished in the second quarter and maybe well beyond.