McDonald’s CEO: This Turnaround Is More Than All-Day Breakfast

January 25, 2016, 6:45 PM UTC
McDonalds To Offer Its Breakfast Menu All Day Long
FAIRFIELD, CA - JULY 23: A McDonald's Egg McMuffin and hash browns are displayed at a McDonald's restaurant on July 23, 2015 in Fairfield, California. McDonald's has been testing all-day breakfast menus at select locations in the U.S. and could offer it at all locations as early as October. (Photo illustration by Justin Sullivan/Getty Images)
Justin Sullivan - Getty Images

No big surprise: Customers and investors alike are big fans of McDonald’s (MCD) all-day breakfast.

The introduction in October of around-the-clock Egg McMuffins and hash browns helped the Golden Arches enjoy its best quarter in nearly four years as it comes off two years of declines. The stock hit a record high today on the news.

The company’s results are also showing up its competitors’. McDonald’s U.S. same store sales growth of 5.7% in the period outperformed the rest of the fast food sandwich segment by 2.9 percentage points, the company said on its analyst call this morning.

CEO Steve Easterbrook, in the job since March, clearly loves all-day breakfast, too, but he stressed on the call that those sausage burritos and hotcakes weren’t the only initiatives serving up good results. He said that the company had been building momentum heading into the quarter and that while breakfast was the primary driver, it was not the sole factor.

Breakfast was the “headline grabber” but other initiatives were contributing as well, he said, pointing to a streamlined menu, improved order accuracy, investments in food quality and ingredients, and menu simplification.

Easterbrook likely wants to turn the focus away from breakfast because the company needs more force to propel the company from turnaround mode to prolonged growth. “We don’t want it to be a single initiative turnaround,” he said.

Here’s what else you need to know from the call:

The value menu is still a work in progress. McDonald’s launched McPick 2, its new value menu, earlier this month, in which customers can pick two out of four items (mozzarella sticks, fries, McDouble, and McChicken) for $2. The plan is currently in test phase, and Easterbrook acknowledged the importance of getting this right, saying 25% of its customers are value conscious. He said that executives liked the simplicity of it for customers but would continue to develop the idea based on customer response.

The Chipotle question. Easterbrook didn’t address Chipotle (CMG) directly, but it seems that McDonald’s does not believe it is benefitting significantly from Chipotle’s food safety woes at this point. Easterbrook said that McDonald’s is mostly recovering lost market share and taking business from its more immediate competitive set in the quick-serve segment. He says the company may potentially be capturing new customers from all-day breakfast, but that the company will likely start taking share from the informal eating-out sector as the turnaround continues.

Digital investments are starting to have an impact. McDonald’s launched its digital app at the end of the third quarter last year and had millions of downloads within three months. Easterbrook said that for the first time management could say it expects incremental sales from its digital platform.

Don’t expect all rainbows and sunshine ahead. McDonald’s CFO Kevin Ozan warned that “financial performance in the coming year is not likely to be linear.” He said to expect some headwinds including macroeconomic issues and challenging guest counts in the U.S., Germany, and France. (Guest counts remained negative or the full year.)

Easterbrook said that he wants to see another quarter or two of positive performance before management switches its mindset from turnaround mode into a longer term growth strategy. He noted that the company has a senior team working on a growth plan but that it’s small and discrete because the “entire organization globally is focused on a turnaround.” He said that could change by the middle of next year.

Here’s where McDonald’s is investing. McDonald’s says to expect about $2 billion of capital expenditures in 2016. About half will go to opening new restaurants primarily in high growth markets (China will get the most, with 250) and the other half to reinvesting in existing restaurants. Meanwhile the company is cutting $500 million in expenses, with $350 million of the cuts expected to be completed by the end of 2017. Part of those savings will come from the refranchising of 4,000 restaurants to be completed by the end of 2018.

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