New company initiatives and outlook: The return of the McRib!

Market Realist

Understanding McDonald's: Comprehensive company primer and profitability analysis (Part 17 of 21)

(Continued from Part 16)

New menu item initiatives

This year, McDonald’s took many initiatives to boost sales and profitability. It introduced the new premium Cheddar Bacon Onion Sandwich and added the new Grilled Onion Cheddar Burger to the Dollar menu, which has shown good preliminary sales results. Plus, it brought back the famed McRib sandwich. One new menu item with mixed results was Fish McBites. On the breakfast menu, the new Egg White Delight introduced in May has been a healthier option. Similarly, the introduction of McWraps has also addressed the needs of health-conscious consumers. One group of products whose results have been preliminarily strong was the new Bacon Habanero Ranch and Deluxe sandwiches. Unfortunately, although preliminary results are promising, these initiatives alone may not be enough to reset the company’s growth in 2014.

Enhancing customer experience

According to management, McDonald’s will continue to build the business in 2013 and beyond by enhancing the customer experience through optimizing its menu, modernizing the customer experience, and broadening accessibility to its brand. The company remains focused on seizing the long-term opportunities in the $1 trillion IEO segment by leveraging its competitive advantages. It has a brand advantage in convenience, menu variety, and value, a resilient business model, and the experience and alignment throughout the McDonald’s system to navigate the current competitive environment in the sector.

McDonald’s number-one priority continues to be satisfying its customers’ needs by serving great-tasting, high-quality food in contemporary restaurants. This focus on its customers is particularly critical in this uncertain environment, where ongoing volatility continues to negatively impact consumer sentiment and spending. The company anticipates a continued flat to declining IEO segment in many of the markets where it operates. Growing market share will remain its focus in order to attain sustainable and profitable long-term growth.

With respect to customer experience, the company will continue to reimage its building interiors and exteriors and provide its restaurant teams with the appropriate tools, training, and technology.

McBites, McWraps, and breakfast items

Company management plans to continue promoting McDonald’s core menu favorites while strategically expanding its menu with relevant new offerings, including premium products that can deliver a higher average check. The company will also place an even greater emphasis on scaling success quickly around the globe. For example, in many markets, management expects to expand its innovative McBites line-up and introduce existing products, including blended ice beverages and large McWraps, into new markets. McDonald’s will emphasize its day parts—like breakfast and extended hours—that are still growing globally in both established and emerging markets.

Accessibility

Accessibility-related efforts will include increasing the level and variety of conveniences provided to its customers through new restaurant openings, extended operating hours, stronger value platforms, and faster, more accurate service through innovative order taking. With operational and financial discipline, the company will execute these priorities to increase McDonald’s brand relevance.

Financial discipline

Globally, McDonald’s will maintain financial discipline by effectively managing spending. In making capital allocation decisions, its goal is to make investments that elevate the McDonald’s experience and drive sustainable growth in sales and market share. The company focuses on markets that generate acceptable returns or offer opportunities for long-term growth. It remains committed to returning all of its free cash flow (cash from operations less capital expenditures) to shareholders over the long term via dividends and share repurchases.

Based on these plans, the company could reasonably increase same-store sales by 2.0% in 2014, but not much more. This would probably result in low– to mid–single digit EBITDA and earnings growth.

Continue to Part 18

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