While many restaurant chains struggled during the economic slump of the past five years or so, McDonald's proved to be quite resilient. Unfortunately, during its fiscal third quarter, McDonald's showed that it is no longer immune to the operating pressures so many other restaurants face. As a result, the coming months could continue to be challenging ones for McDonald's.
The news from McDonald's fiscal third quarter, which ended Sept. 30, 2012, is peppered with good and bad. For example, McDonald's net income dropped by 3.5 percent on a 0.2 percent decline in revenues. Global comparable store sales were up 1.9 percent while comps in the U.S. were up 1.2 percent for the quarter. U.S. comparable store sales were up 0.7 percent in September and the chain's spokesman said October comparable sales were trending negative. McD's performance was significantly below the financial analysts' forecasts and investor disappointment resulted in the chain's stock dropping 4.5 percent on Friday, October 19. McDonald's blamed their quarterly results on "softening demand, heightened competition, and rising costs..."
And, thanks to Scott Hume, publisher of Burger Business, we were given a look behind the McDonald's curtain to see what is happening at the unit level when he shared with us a copy of a report from Janney Capital markets.
The investment firm Janney Capital Markets runs surveys of McDonald's franchisees, and their most recent survey of 30 domestic operators representing 254 restaurants paints an unhappy picture. The causes of concern include rising food prices, mandated menu price discounts and required remodeling projects. One operator said half of his rebuilt and remodeled units now have negative cash flow while another pointed out he had to bear the cost of remodeling his landlord's (McDonald's) building. Another complained about replacing "perfectly good equipment." The surveyed operators seem to be pretty uniformly negative on the future and this same attitude showed up again when asked about their relationship with McDonald's Corporation. On a scale of 1 to 5 with 1 = Poor and 5 = Excellent the response was an average of 1.77, which is somewhere between Poor and Fair. In Janney Capital's survey of McDonald's franchisees 3 months ago the same question pulled an average 2.42.
Economic News This Week:
- First-time jobless claims shot up by 46,000 to 388,000 for the week ending October 12. This is the largest number of initial claims in three months. The previous week, claims had dropped a dramatic 30,000 to 339,000. As some observers noted last week, there was probably some statistical glitch or, as one person put it, a "seasonal anomaly." The less volatile 4-week average is 365,000 according to the Department of Labor and has stayed pretty close to that number since March of this year.
- Unemployment fell to 7.7 percent on a seasonally adjusted basis in Mid-October from 8.1 percent in September, according to a Gallup poll. This is the lowest level of unemployment since Gallup began studying the matter in January 2010. The percentage of people who desired to have full time work but working part time jobs rose from 8.6 percent in September to 9.0 percent this month.
- The news on the home building front was very good. The Department of Commerce reported housing starts rose 15 percent to an annualized rate of 872,000. Single family home starts were up 6.7 percent while multi-unit starts – which are usually more erratic – were up 20 percent. Building permits were up 11.6 percent, with single family home permits up 16 percent. While these numbers are a vast improvement over previous years, in a year with a good economy there would be roughly one and a half million new homes built.
- Existing Home Sales retreated 1.7 percent in September, according to the National Association of Realtors who report sales now running at an annual rate of 4.75 million homes. This is down from 4.83 million homes in August. The good new is that NAR said median home prices are up 11 percent from September 2011. Rather than a big move in home prices overall this may be a reflection of fewer foreclosures and short sales. NAR reported that 24 percent of September home sales were distressed sales this year vs. 30 percent in September 2011.
- The Philadelphia Federal Reserve Survey Index was +5.9 in October, up sharply from -1.9 in September. A look at the survey's detail shows mixed results with shipments up substantially while new orders and manufacturing employment were both in negative territory.
- The Leading Economic Indicators rose 0.6 percent in September. A spokesperson for the Conference Board said the numbers indicated "fluctuating slow growth."
Foodservice News This Week
- Knapp-Track reported September same-store sales declined 0.8 percent for the 60+ casual restaurants in Mr. Knapp's program. Traffic was down 2.5 percent while check average rose 1.7 percent. Mr. Knapp noted this was the smallest check average increase after 12 consecutive months of increases of 2.0 percent or more. Given promotional activity and initiatives by large casual dining chains to grow sales, Mr. Knapp sees the possibility of comparable store sales increase but also notes December comparisons may be tough due to the extremely mild winter weather. Therefore, he described the outlook as "potentially positive but uncertain." Knapp-Track information is courtesy of Bank of America Merrill Lynch.
- Restaurant chains from abroad continue to find their way to America and Technomic identified ten concepts to watch: Nando's Peri-Peri (South Africa), Gyn-Kaku (Japan), Little Sheep Mongolian Hot Pot (China), Guzman & Gomez (Austraila), Pie Face (Austrailia), Paul (France), Pret A Manger (UK), YO! Sushi (UK), Freshii (Canada), and Giraffas (Brazil).
- America's Favorite Pizza Chain is CiCi's as determined by a Market Force study. The researcher based their finding on the number of "favorite" votes with the number of locations factored in. Papa John's was second followed by Papa Murphy's, Sbarro, Pizza Hut, Godfather's, Domino's and Little Caesars.
- Mama DeLuca's Pizza, which Subway has been quietly working on for a couple of years, appears ready for a roll out according to CSP Daily News. The made-to-order pizza chain offers full pies and slices as well as bread sticks, calzones, and wings. The operation comes with a "plug and play" equipment package and takes just nine feet of counter space. Thus, the concept is considered a "natural" for C-stores according to the article.
- Growth Chains: Popeyes announced an agreement to purchase 28 restaurants in Minnesota and Northern California that "are currently in the trade image of another quick service restaurant concept" and convert them to Popeyes. One source identified the restaurants as KFC units. Cousins Subs franchisee will open 10 restaurants in the Greater Phoenix area in the next 3 years. Teriyaki Madness, currently with 7 locations, plans on having 11 restaurants by the end of next year, 25 within 3 years, and 100 within 5 years. Mama DeLuca Pizza has 25 units, up from 12 last August, and plans to open 7 more by the end of this year. Corner Bakery plans to double their current 147 locations with the next 4 years.
- Comparable Store Sales: Chipotle Mexican Grill (up 4.8 percent), Domino's (up 3.3 percent), Del Frisco (up 3.8 percent), McDonald's (up 0.7 percent), and Sonic (system up 2.3 percent, company-owned up 4.3 percent, and franchised up 2.1 percent)
For additional information and comp store sales data on other chains, please click here.