Like Tesco in the UK retailing, and Walmart, America’s retailing giant, McDonald’s, the burger behemoth has been hit by a sales slowdown which shows little sign of going away.
The fast food giant, whose golden arches are more familiar to Australians than Tesco and Walmart (even though both companies have influenced Australian retailers such as Coles and Woolies) is looking at growing questions about its ability to grow.
McDonald’s is in the midst of a horrid sales crunch, in part due to problems in China with quality, but more to a stumbling sales performance in its main market – the US which won’t go away.
In fact McDonald’s US troubles resemble those Walmart has battling for several years – slowing sales growth as its core audience slowly drains away.
Walmart has replaced its US CEO twice in the past five years with former Woolworths retailing heavyweight, Greg Foran moved from China to the US slot six weeks ago.
McDonald’s has replaced its US boss twice in as many years as it searches a formula to recapture is old golden growth momentum.
Tesco’s situation is a little different – it has been too slow to react to aggressive price cutting by smaller, low cost discounters, and its sales model of trying to be all things to its consumers is being questioned.
The problem for these giants is that in their respective core market they are as close as anyone to full saturation – they are just too big, too slow and no longer nimble.
After years of being thought of as ‘growth stocks’ they are now facing low growth and increasingly pressures on profit margins.
Growth for them will be no faster than inflation and population growth at times, slower for long periods as well. Costs will need for watched closely and cut, expansion curtailed and made far more focused. Acquisition is still a path to growth, but doing big deals will make these groups even larger and slower moving.
Break up will be hard because they all have a unified marketing approach – their names are their strengths.
And their expansion plans offshore will not be the saviours management and the boards expect because so far, their successes are few and far between.
Walmart’s best market offshore is the UK in the shape of supermarket chain, Asda. Walmart had solid growth from Mexico, but that has been hit by corruption charges. But operations in China, Europe and Asia have been weak or loss making and some have been sold or closed and huge losses incurred.
But of the giants, McDonald’s problems will have the greater impact here because of its greater ubiquity.
Overnight Tuesday, McDonald’s Corp. said its global comparable (same store) sales fell 3.7% in August as problems with one of its suppliers in Asia (and Australia) saw a huge plunge in sales in China and Japan.
The sales decline was steeper than the 3.1% forecast by analysts and it was the third month in a row the company’s comparable store sales have fallen – they last rose in May this year.
In the Asia/Pacific, Middle East and Africa region, sales at existing outlets slid 14.5% last month, thanks to weaker sales in China. That was nearly double the 7.3% slide in July, when the quality problems first started appearing in China in particular. Australia’s performance wasn’t mentioned.
In the US, sales slid 2.8%, slightly better than the 3.2% fall in July, but not enough to save the head of the US operation who was replaced, along with several senior marketing executives.
McDonald’s sales fall in August
The US has been the challenging market for McDonald’s, where the company has admitted it has lost relevance with consumers. It now has seen comparable store sales slide since November 2013.
McDonald’s sales at existing restaurants in Europe fell 0.7% in August (after rising half a per cent in July) as weak performance in Russia (which has closed several stores in a tit for tat move against western sanctions) offset gains in Britain.
For the eight months to the end of August, McDonald’s global comparable store sales are up just 0.2% over the sam period of 2013, with US sales down 1.1%, European sales up a solid 5.7%, but sales in Asia, Pacific and Middle East down 1.6%.
The company is now warning of increasing weakness in Europe in coming months, so the news flow on sales looks like being more negative than positive.
The sluggish US economy is having an impact, but the slow down goes back to 2008 – 2010 and the depths of the US recession when consumers were so poor they started going without McDonald’s meals, especially at breakfast time.
To try and get American consumers back in to the stores, McDonald’s offering a free coffee (one standard size a day) promotion – the second of its kind from September 16 to the 19th. It follows the first promotion in March.
The aim is simply to get more people into the company’s thousands of stores across the US where special food offers and coupons will await them to try and get them to spend money. That is a measure of McDonald’s desperation.
A small report in the online edition of Businessweek this week revealed the problem for McDonald’s:
"While all fast-food chains have become less popular with (US) families, McDonald’s has fared worst. In 2011, families with a child aged 12 or under accounted for 18.6 percent of McDonald’s customers, according to research firm Technomic. By mid-2014, such families accounted for 14.6 percent of McDonald’s visitors."
Businessweek said other chains had surplanted McDonald’s as the most favoured among consumers, with one of those the Mexican chain, Chipotle, which McDonald’s used to own, but sold off eight years ago.
Businessweek reported last year: "When it sold out completely seven years ago, after ramping Chipotle up from 16 locations to more than 500, the Golden Arches pocketed $1.5 billion. Chipotle, which has since tripled its store count, is now valued at just more than $13 billion."
And that sales momentum for Chipotle, which has continued into this year, would have driven sales growth in the US, saved quite a few corproate careers, and seen the share price higher (it’s currently around $US91, close to their year low of $US90.96).
But China is the biggest, most immediate headache where the company first has to restore customer trust in what is being sold in its 2000 – pluss outlets.
That was after quality problems with chicken and beef products from meat supplier Shanghai Husi Food Co., owned by U.S.-based OSI Group (McDonald’s was also forced to stop imports from OSI plants in other Asian and US markets, including Australia).
Chinese authorities accused the Shanghai plant of intentionally selling expired meat to restaurant companies after a state run television station ran a report alleging the practice.
Overnight Tuesday McDonald’s said it expects the China supplier issue will hurt third-quarter results by about 15 US cents to 20 US cents a share, largely because of lost sales, higher expenses related to its recovery efforts and a higher tax rate.
There is more pain to come with what’s expected to be a weak update on the company’s full-year 2014 financial outlook to be provided in conjunction with McDonald’s third quarter earnings release on October 21.
But Macca’s is yet another global giant which has lost its way because of its own success and growth, but with no idea of how to break free.
