Following the tainted meat scandal blowing up in China in July, there was little doubt the repercussions for McDonald's (NYSE:MCD) would be substantial, but the severity of their decline in August demonstrates just how severe the problems are that it faces and means the burger joint won't be staging a meaningful recovery anytime soon recommend rewording this sentence..
Business all over has been lackluster for McDonald's; in the U.S., the restaurant chain has failed to produce a single month of positive same-store sales for 10 straight months. But now a weakening picture abroad is turning into a rout, with same-store sales plunging 14.5% last month in the Asia-Pacific region as its China and Japan markets reel from the scandal.
The fallout has also hurt Yum! Brands (NYSE:YUM), which reported that sales at its KFC and Pizza Hut chains in China also tumbled 13% in July, suggesting the numbers it reports for August may be just as bad or worse than those from McDonald's. Also caught in the snare were other international brands such as Burger King, Papa John's Pizza, and Starbucks.
Both Yum! and McDonald's immediately halted shipments in China from fast-food restaurant supplier Shanghai Husi Food after local media revealed the supplier was using expired meat in the products sold to its customers. The problem spread to McDonald's Japanese division as well, and it was forced to suspended ties to the company several days later.
If the experience Yum! suffered last year following another tainted meat scandal -- that one an uproar over the use of unapproved antibiotics in chickens -- is any indication, McDonald's faces a long, slow slog to rebuild its reputation. Yum! itself might be significantly damaged, as it had only just recovered the trust of consumers who might not prove willing to give it a third chance.
McDonald's sales in China were already weak, with comps down 3.6% in 2013. It operates some 2,000 stores in China, which joins with Japan and Australia to produce 54% of its Asia-Pacific, Middle East, and Africa segment, which itself is responsible for nearly a quarter of McDonald's total revenue. China itself is the burger joint's third-largest market, accounting for 10% of its revenue.
Unfortunately, the scandal isn't McDonald's only problem, as domestic sales have been unable to gain any traction. The fast-food giant is stuck in a deep freeze from which it's been unable to thaw.
The one bright spot over the course of nearly a year was its free coffee promotion last April that, if nothing else, allowed it to record same-store sales for the month that were flat from the prior year. That could explain why it's running the promo again this month.
In response to rivals such as White Castle and Yum!'s Taco Bell entering the breakfast market, McDonald's sought to remind customers why they come to its restaurants in the morning in the first place: java. According to Technomic, the Golden Arches still owns the breakfast daypart with a 31% market share that generates 20% of its $28.1 billion in annual worldwide revenue. Coffee, particularly its McCafe line of brew, is a large part of that.
But going to the well again so soon smacks of desperation. If the only way to get people to come back is to give away its best-selling item, then McDonald's is in deep trouble.
Starting next week and running through the end of the month, McDonald's is giving away a small cup of coffee. Additionally, it is running a social media campaign with the hashtag #sipandtell that invites customers to relate their embarrassing pre-coffee moments. That might be a course of action that management comes to rue.
McDonald's previously tried to generate viral good feelings and support for the company using the hashtag #McDStories, in which people could share their positive moments at the restaurants, but it was quickly hijacked by customers who instead shared horror stories. It seems easy enough to imagine the current campaign can also go off the rails, which might be a good metaphor for the company.
Consumers are becoming increasingly conscious of what they're eating, and more often than not choosing healthier fare. That means McDonald's could be stuck in a morass of slow sales here at home, while suffering from a vortex of trouble abroad. In both instances, it's a situation free coffee can't resolve.
Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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