Some analysts reckon giant consumer products companies have gone ex-growth and are at best annuities.
The latest quarterly results from Coke and McDonald’s its companion company among fast moving commercial products, would tend to support that view.
Coca Cola is in trouble with its customers not drinking as much carbonated drinks as forecast, it’s diversifications are either not working, or its too early to say and the rest of the empire is struggling, especially in Australia.
And if anything, of the two huge companies, burger giant, McDonald’s, is in worse shape.
Besides it’s tanking US business, it’s in trouble in China and Russia where for various reasons the two governments have taken a set against the company.
Competition is picking up, US consumers don’t like a complicated menu and are not buying Maccas with the same regularity as in past years, and health and dietary issues are starting to intrude, just as they are doing for Coca Cola.
Coke’s income dropped by around 12% in the September quarter, McDonald’s suffered a nasty 30% slide in net income for the September quarter.
McDonald’s reported earnings of $US1.07 billion in the three months to September, compared with $US1.52 billion in the same quarter a year earlier. Revenues fell 5% to $US6.99 billion.
“McDonald’s third quarter results reflect a significant decline versus a year ago, with our business and financial performance pressured by a variety of factors – from a higher effective tax rate, to unusual events in the operating environments in APMEA (Asia Pacific Middle East Africa) and Europe, to under-performance in the U.S., our largest geographic segment,” McDonald’s CEO Don Thompson said in the company’s profit statement.
McDonald’s problems were underlined by a 4.1% decline in its US same-store sales, the worst performance in its core market since February 2003. That’s despite McDonald’s replacing its head of US operations twice in the past year. Globally, McDonald’s saw a 3.3% fall in same store sales in the quarter.
McDonald’s has around 40% of its 35,000 outlets in the US, so the problems there are company-threatening.
In response, McDonald’s Chief Executive Don Thompson said Tuesday said it would simplify its menu starting in January, in part to remove low-selling products, and plans to give the company’s 21 domestic regions more autonomy in rolling out products that are relevant to locals.
He said that by the third quarter of next year, McDonald’s plans to fully roll out new technology in some markets to make it easier for customers to order and pay digitally and to give people the ability to customise their orders, part of what the company terms the “McDonald’s Experience of the Future” initiative. The company is one of the sign up partners for Apple and its new iPhone mobile digital payments system.
“The key to our success will be our ability to deliver a more relevant McDonald’s experience for all of our customers,” Mr. Thompson said. “Customers want to personalise their meals with locally relevant ingredients. They also want to enjoy eating in a contemporary, inviting atmosphere. And they want choices in how they order, choices in what they order and how they’re served.”
McDonald’s has seen sales fall in recent years as low-income consumers continue to struggle in the wake of the financial crisis. Those challenges have been compounded after a Chinese subsidiary of a key American supplier was accused of re-labelling expired meat and breaking other food safety rules.
That sent sales in the huge Chinese market, is third biggest, tumbling and in turn dragging down profits.
Sales in the APMEA regions fell 9.9% in the quarter because of the problems in China.
Compounding the problem for McDonald is that this supplier, OSI, also supplied another key market – Japan where McDonald’s Japan, half owned by the US giant, had revealed a fall in profit as well.
This food safety scandal contributed roughly half of the 14% drop in operating income, while weak performance in the US and parts of Europe made up the rest. The scandal knocked 15 cents off the company’s earnings per share in the September quarter, and is expected to hit earnings by 7-10 cents a share in the fourth quarter.
In Russia the government has picked on McDonald’s and its high visibility with a crack down on health and other alleged violations in up to half of the fast food giant’s 450 outlets.
It is pure retaliation against the sanctions imposed by the US and EU and it’s adding to the financial pains from the China scandal and the problems in the US domestic market.
Analysts say an estimated 70% of the company’s sales come from its drive in windows (but in the US people are driving less, so sales growth has disappeared). The changes the company have made so far, especially in the US (the complicated menu) has adversely affected that core sales channel. The longer people take at the drive thrus, the less McDonald’s sells.
That’s why simplifying the menu and speeding up ordering and delivery in outlets is a key part of the latest changes. If that doesn’t happen, the company will remain under increasing pressure.
Like Coca Cola, McDonald’s is stuck in something of a time warp where its core US business is no longer as central to its core consumers as it once was. For a variety of reasons, the tastes and needs of American consumers are changing, leaving both consumer products giants behind and looking flatfooted.
And like a very big ship, McDonald’s, with its $US30 billion in sales, is very hard to change course, and respond to changes in what its consumers want.
