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McDonald's gets it right with focus on 'core' markets and menu

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A McDonald's restaurant sign is seen at a McDonald's restaurant in Del Mar, California April 16, 2013. REUTERS/Mike Blake

If McDonald's (MCD) focus for the months ahead were to be described in a word, "core" would suffice, for both its menu and its markets.

The world's biggest restaurant chain measured by sales indicated Tuesday that four of the largest countries in its system  including the U.S.  along with its best-known items will get considerable attention from the corporate office as it bids to restore customer growth and keep the menu workable.

In addition to  the United States, "stabilizing key priority markets" of Germany, Japan and Australia will be critical to staving off competition, whether from Burger King (BKW) or Chipotle (CMG),  either at home or abroad. The U.S. is Oak Brook, Ill.-based McDonald's most saturated market, with more than 14,000 stores. However, the top four countries together accounted for 56% of total global locations, making up 19,830 of the 35,429 restaurants McDonald's had at year end.

At the same time, McDonald's, which has previously said its menu had become too difficult to manage with a slew of new offerings and limited-time promotions such as Mighty Wings, will be looking at "more effectively balancing our focus on the core menu." This would be those goods such as the Big Mac, Egg McMuffin and fries, which all told make up around 40% of total sales, CEO Don Thompson said on a conference call. These, he added, are the items that "truly represent McDonald's to all of our customers." And with a new U.S. marketing chief on board, it will have the opportunity to reinforce the message.

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This isn't to say the company is abandoning the emerging and smaller nations where it does business, nor will it give up altogether on special, short-run fare, or innovations such as the McWrap. But it is in line with the idea that it's seen the significant challenge of trying to be all things to all people, whether with healthier options such as salads or items that slow down the kitchen staff.

McDonald's executives made the remarks as the restaurant operator and franchisor posted its numbers for the first quarter of the fiscal year. Revenue was $6.7 billion, up from $6.6 billion a year ago, with earnings of $1.21 a share, down from $1.26 last year. Operating costs rose by 2%, or $108.5 million.

Customer traffic a concern

Same-store sales worldwide ticked ahead 0.5%, but that was driven by higher spending at the counter. The downside was that customer traffic, negative last year for the first time in at least a decade, suffered again. However, in fairness, that was influenced by the U.S., where winter storms kept customers away and contributed heavily to a 1.7% drop in comparable domestic sales. Still, even with that fact, McDonald's has seen visitor trends going against it for some time now, and eventually that has to reverse if sales growth is to remain on the positive side.

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In Europe, comparable sales rose 1.4%, though Germany was weak. The Asia Pacific, Middle East and Africa region had a 0.8% increase in same-store sales, but Japan and Australia were laggards. Not surprisingly then, McDonald's is eyeing these trailing markets for its restorative efforts.

As for April, the first month of the second quarter, comp sales should be modestly positive, the company said. Shares of McDonald's barely moved on the day, decreasing 0.4% to $99.32. On Wednesday shares are also relatively flat, up just 0.24% in late-morning trade. The stock has gained 2.4% so far in 2014.

Concentrating on the big markets and signature menu items is smart, and it makes it clear McDonald's is, for now at least, sticking to its promise to keep it all simpler, as opposed to rolling out item after item that clutters the menu. That slows down decision times for customers, and complicates things for the staff striving to get orders done. Neither are especially welcome when low prices, volume and consistency are what's needed for the success of a business.

A "basic operations focus," such as better staffing and scheduling at the proper times, will, Thompson believes, improve productivity. Changes to preparation stations are already being implemented to hasten order completion and allow for custom sandwiches. Critics won't like this, but McDonald's is going to be profitable, with astonishing sales ($89 billion last year), for years to come, and staying  primarily  with what got it here has a great deal of merit.

Meanwhile, McDonald's didn't sound too terribly distressed about the "breakfast wars," saying it's fine to have a battleground during the early hours of the day when drivers desire coffee and sausage.

"There has been breakfast competition for a number of years in the U.S. market," Thompson said. "It seems every year there's someone new that is making a run." He mentioned taco sellers among them, but didn't specifically identify Yum Brands' (YUM) Taco Bell, which recently started selling breakfast, stirring a media frenzy surrounding its Waffle Taco. Yum reported earnings after the bell Tuesday, beating on the profit line with 87 cents a share and just missing on revenue, at $2.72 billion. Shares were up after hours following the report but are down around 2% in late-morning trade on Wednesday.

For now, despite the hype surrounding the McDonald's/Taco Bell rivalry, "we have not seen an impact relative to the most recent competitors that entered the space," Thompson said, though McDonald's expects any new entrants, especially those doing so on a large scale, to draw in customers who want to sample the alternatives.