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McDonald’s in 2Q15: A Long Way to Go in the US Market

Adam Jones

How to Interpret McDonald’s Mixed 2Q15 Results

(Continued from Prior Part)

The US market

Previously in this series, we learned that the US market generates 40% of revenue and over 50% of operating income for McDonald’s (MCD). This segment needs critical attention because same-store sales growth has been disappointing for the past three years. With over 14,000 units in this market already, there’s little room to stimulate growth by adding more units.

What management promised

When the turnaround plan was announced on May 4, the company said it would take the following steps to improve the situation in the US:

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  1. Be more transparent about food quality to clear up any misperceptions.

  2. Change core products with a view to becoming more relevant to customers—for example, McDonald’s announced that it would start using antibiotic-free chicken.

  3. Give more control to customers by offering them the ability to personalize their orders.

What management delivered

“Value, service, and menu” is what management delivered in the US market during the most recent quarter. The biggest value that McDonald’s offers to its customers is price point. The company is working toward a national price-point platform.

On the service front, the company is cutting menu items, speeding up service at drive-throughs by displaying fewer choices, and introducing two-lane drive-throughs to speed up service.

On the menu front, the company will expand its all-day breakfast test to more stores.

These initiatives appear to miss the mark on changing food preferences in the US. Today, more US customers prefer food that is perceived to be healthy and free of artificial flavors, colors, antibiotics, growth hormones, and genetically modified organisms.

Chipotle Mexican Grill (CMG) has led most of the initiatives in this regard, but companies including Panera (PNRA) and Yum! Brands (YUM) have also announced similar initiatives.

Improving value, service, and menu initiatives the way McDonald’s is doing appears to be more of an operational cleanup. To mitigate these risks you might consider the Consumer Discretionary Select Sector SPDR Fund (XLY).

Next, we’ll wrap up this series with key financial updates and management guidance for the remainder of 2015.

Continue to Next Part

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