In meetings with American securities analysts in Germany and Poland, McDonald’s Corp. officials detailed the value-focused initiatives meant to manage through depressed consumer confidence domestically and in Europe, revealing what is likely to be a long, difficult road ahead.
Two analysts, Sara Senatore of Bernstein Research and Jeffrey Bernstein of Barclays Capital, concluded in separate research notes that, despite leading both Germany’s and Poland’s quick-service sectors in market share, McDonald’s would face pressure on its sales growth and profit margins as consumers pull back on their spending. The analysts met with McDonald’s chief executive Don Thompson, chief operating officer Tim Fenton and McDonald’s Europe president Doug Goare while touring the chain’s restaurants in Munich, Germany, and Warsaw, Poland, recently.
In the near term, McDonald’s is moving decisively in the direction of more value in Europe to grow traffic and market share, though officials acknowledged it is too early to tell how soon this strategy would lead to stable sales and profit growth. They also disclosed plans for an intensified value focus in the United States in the fourth quarter.
Germany, Poland drag down European results
In McDonald’s European division, which contributes 38 percent of the company’s annual global operating profit, Germany and Poland are emblematic of the economic havoc wrought on the region by high unemployment and declining consumer confidence.
“Polish customers’ confidence reflects the continued uncertainty around the strength of the euro and global demand,” Senatore wrote, “while German consumer sentiment appears to have worsened since July, as consumers calibrate what it will mean to bail out the rest of Europe.”
Bernstein noted that the informal-eating-out market is contracting in Germany and has stalled in Poland. While inflation for food, labor and rent continues to rise, “McDonald’s is not willing to pass along enough price to offset, leading to compression of margin and profit growth,” he wrote.
In both countries, McDonald’s is building up its value platforms and emphasizing that in its marketing. The chain is also laying the groundwork for sales of premium products in the future with carefully timed limited-time offerings to help offset some of the margin erosion inherent to a value push, Bernstein noted.
“Interestingly, after the introduction of value platforms, customers will often heavily use the value menu based on the perception that the platform is short-term in nature and will soon no longer be an option,” he wrote. “Once customers realize the value emphasis is longer-term in nature, they increasingly use other portions of the menu, helping in the recovery of both the average check and restaurant margin.”
That dichotomy is on display at Germany’s 1,420 McDonald’s locations in the form of the SMS value menu, similar to the U.S. Dollar Menu, and the McDeal combo meal, which launched in June. According to Bernstein’s research note, the SMS menu — which sells items for 1 euro to 1.49 euro — accounts for 20 percent of sales in Germany. The McDeal offering includes a choice between two sandwiches, plus fries and a drink, for 3.79 euro.
Senatore noted that McDeal was a response to competitors’ aggressive discounts in Germany, where McDonald’s wishes to avoid a race to the lowest price point...