What McDonald's needs: A follow-up to all-day breakfast

For McDonalds (MCD), all-day breakfast was a big hit when CEO Steve Easterbrook launched it last October, but Wall Street is now wondering what else he can cook up. Critics still accuse the home of the Golden Arches of becoming too complacent in the face of heightened competition from rivals and changing consumer tastes.

And now that the hoopla surrounding the all-day breakfast promotion has died down, investors want more from the chain.

It’s not that Easterbrook isn’t listening: He’s in the midst of an ambitious plan to overhaul the giant fast-food chain. A U.K. native, Easterbrook has vowed to slash $500 million in costs by 2018; overhaul the chain’s menu, which franchisees have complained for years has become bloated with poorly selling items; and improve customer service, which has long been a weakness.

The overhaul, though, remains a work in progress, especially in the view of franchisees, who own the vast majority of McDonald’s restaurants and have complained bitterly about falling profits and rising costs.

McDonald’s saw a 1.8 percent increase in same-store sales (which measures activity at locations open a year or more) in the second quarter, but that was well below the 3.2 percent rise analysts had expected. And according to a Nomura Securities survey of 30 franchisees that own 271 stores sales, same-store sales in the third quarter rose just 0.2 percent. Wall Street analysts’ consensus forecast for the third quarter is for 1.3 percent gain. McDonald’s will report its third-quarter results on Friday, Oct. 21.

Ominously, the independent business owners Nomura surveyed now expect same-store sales to fall 0.8 percent in the current quarter.  

Shares of McDonald’s have dropped about 6 percent this year, underperforming the S&P 500 Index, which has risen 4 percent year-to-date. 

“We are discounting almost everything,” said one respondent to the Nomura survey whose name wasn’t disclosed. “It is all about top-line sales, not running profitable restaurants. That’s why operators need several restaurants today, as the return on their investment dwindles.”

Under Easterbrook’s leadership, McDonald’s has tried to address public concerns about the quality of its food through plans to purchase eggs laid by cage-free hens in coming years, eliminating high-fructose corn syrup from its buns and ending the use of hormones in its chicken.

McDonald’s also is overhauling its management ranks. Chief Field Officer Karen King, who oversees the chain’s more than 14,000 U.S. restaurants, plans to retire at the end of the year, as does Erik Hess, the vice president in charge of consumer experience, and McDonald’s USA head Mike Anders. A spokesperson for McDonald’s couldn’t immediately be reached for comment for this story.

Many Wall Street analysts see better times ahead for the corporate home of Ronald McDonald, though opinions are divided on whether investors should purchase the stock now. The average 52-week price target on the stock is $127.83, roughly 15 percent above its Oct. 19 close of $111.26. 

However, turning around a multinational company like McDonald’s, whose market capitalization is about $95 billion, isn’t easy under the best of conditions.

According to Richard Adams, a former McDonald’s franchisee who runs the consulting firm Franchise Equity Group, the chain benefited last year from the unusually warm winter weather, which is unlikely to be repeated this year.

“If we have a normal winter, it will be impossible for McDonald’s USA to show positive sales numbers over the next six months,” he wrote in an email. “All-day breakfast has been an interesting promotional activity, but it hasn’t had a big impact on same-store-sales.”

Wall Street’s expectations for McDonald’s third-quarter results are modest. Per-share profit is forecast to hit $1.49 versus $1.40 a year earlier on revenue that’s expected to fall 5 percent to $6.28 billion. Sounds like Easterbrook might need to keep adding ingredients to his overhaul strategy. 

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    Jonathan Berr is an award-winning journalist and podcaster based in New Jersey whose main focus is on business and economic issues.