McDonald’s hit by slowing sales, strong dollar
BY SANDRA GUY Business Reporter sguy@suntimes.com July 23, 2012 8:24AM
LONDON, ENGLAND - JUNE 25: An interior view of the world's largest McDonald's restaurant and their flagship outlet in the Olympic Park on June 25, 2012 in London, England. The restaurant, which is one of four McDonald's to be situated within the Olympic Park, will have a staff of 500. After the Olympic and Paralympic Games conclude the restaurant will be dismantled and all fixtures and fittings will be either reused or recycled. (Photo by Oli Scarff/Getty Images)
Updated: August 25, 2012 6:06AM
McDonald’s Corp.’s lower-than-expected quarterly revenue and net income results on Monday served as a dour warning to other Chicago-area companies that do business overseas: A strong dollar, European economic woes and rising food, labor and health-care costs are real drags.
CEO Don Thompson, who took over from Jim Skinner on July 1, led a conference call with analysts Monday to explain the challenges.
“We are not satisfied” with the results, he said, noting that the “more difficult global environment” requires the Oak Brook-based fast-food giant to “crank up” its marketing and “be more flexible and competitive.”
In Italy, for example, Thompson said streetside cafe owners quickly change their prices to undercut the fast-food chain, and that even seemingly healthy places such as the U.K. face tougher austerity measures in the second half of the year.
He cautioned that McDonald’s July sales may slow even more given greater competition, higher labor and commodity expenses, currency exchange rates that hurt results and tougher austerity measures ahead throughout the euro zone, including in Spain and Italy.
McDonald’s does 40 percent of its business in Europe, but consumers worldwide, including in the important Chinese market, are squeezing expenses, eating at home and finding deeper discounts.
“This is a little bit more than a European cold,” said Thompson. “It’s a global [phenomenon] across the board.”
That means McDonald’s will enhance its value menus in Japan and Australia and be more cautious in raising menu prices in the United States and Europe, he said.
McDonald’s also sounded a warning for other companies in the United States now that President Barack Obama’s health-care reforms are moving ahead. Chief Financial Officer Peter Bensen said each of its restaurants will pay $10,000 to $30,000 more in yearly health-care expenses.
McDonald’s operates 14,000 restaurants in the United States. Most are franchised.
McDonald’s stock fell 2.88 percent Monday, making it one of the worst performers in the Dow Jones industrial average.
The company’s net income dropped 4 percent in the second quarter, and its global sales increase of 3.7 percent was the slowest growth since fourth-quarter 2009.
McDonald’s earned $1.35 billion, or $1.32 per share, in the quarter, down 3.6 percent from the year-ago period’s $1.4 billion, or $1.35 a share.
The company’s shares have dropped 11 percent so far this year.
But Thompson remained optimistic. He said McDonald’s had planned ahead and won’t pay as much for commodities as first anticipated, and that it will continue its big initiatives, opening 1,300 new restaurants, upgrading 2,400 existing restaurants, selling premium products like McWrap sandwiches and cherry-berry chiller drinks, and pitching reasons customers should not just go to the grocery store to buy cheaper eats.
“We understand what we are facing,” he said. “We’ve been in situations like this before. We have a resilient business model and experience in every type of operating environment.”
