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McDonald’s trying more value as traffic slips

The company is planning a two-for-$5 offer next month amid continued declines in U.S. guest counts.
McDonald's

McDonald’s on Thursday said its same-store sales rose 2.6% in its key U.S. market in the second quarter ended June 30 as consumers ate more premium burgers and operators raised prices.

But guest counts continued to decline, executives said, without revealing by how much, amid growing competition for value customers from other burger chains. Executives blamed some of that competition for a decrease in the gap between McDonald’s and its competitors, which narrowed in the quarter, they said.

That has the company working again to tweak its value messaging to get more competitive. The Chicago-based burger giant plans to introduce a new value offer early next month: Two premium sandwiches for $5.

“We’re not looking to win on value,” CEO Steve Easterbrook said during the company’s second quarter earnings call Thursday. “But we will remain competitive on value.”

“We’re not intending any race to the bottom,” he added later. “We just want to be competitive.”

McDonald’s stock fell 2% in morning trading on Thursday. The company’s financials, including its U.S. same-store sales performance, bested investors’ expectations. But concerns about traffic persist. And weak guest counts in the U.S. largely pulled down its global traffic growth in the period. Global same-store sales rose 4% in the quarter, the company said.

McDonald’s is undertaking numerous efforts in a bid to expand its customer base. It has delivery in more than 5,000 of its nearly 14,000 U.S. locations. It has kiosks now in a similar number of locations. It started selling fresh-beef Quarter Pounders in May. And it introduced a new value menu, the $1 $2 $3 Dollar Menu, in January.

But the new dollar menu didn’t quite pull in traffic as hoped. Instead, customers added many of the lower-cost items to their existing orders, which helped increase average check. In addition, customers ordered more Quarter Pounders and Signature Crafted burgers that are made with fresh beef, driving up premium sales.

The company’s key breakfast daypart has struggled for the first time in recent memory.

“We’ve just begun to lose a little bit of share in that daypart in particular,” Easterbrook said.

Executives on Thursday blamed problems during breakfast on a shift in the chain’s marketing late last year from local to national. Executives said that marketing shift hurt breakfast in particular because it’s more locally driven than other dayparts. Some local areas are more coffee-focused, for instance, while the chain’s Southern restaurants tend to sell more biscuits.

CFO Kevin Ozan said that breakfast guest counts continued to be negative in the second quarter, but same-store sales during the daypart increased, thanks in part to a new two-for-$4 breakfast sandwich offering.

Executives said on the earnings call that fresh beef started with 80% customer awareness, which Easterbrook said was “way at the top end of any launch of a new activity.” He also said that customer sentiment was high on the product, in which quarter-pound burgers are made with fresh beef to order.

But the shift was a “material change” to the company’s operating system, which led to a “slight operational complication” that added a few seconds of service time on average to orders. That hurt McDonald’s drive-thrus, executives said.

The company is looking at changes to simplify its operation and speed that service.

Worldwide, McDonald’s has delivery in 13,000 markets around the world, up from fewer than 8,000 a year ago. In some top markets, delivery makes up as much as 10% of sales at restaurants that are offering the service.

That was done with “virtually no additional investment,” Easterbrook said. The company is working on marketing promotions to stimulate more growth, and executives said they’ve improved efficiency so orders are delivered more quickly.

“The delivery market continues to grow,” he said. “It’s moving at a pace unprecedented for the McDonald’s system.”

One area outside the U.S. where McDonald’s has seen some traffic challenges was China, where the company has 2,800 locations.

Guest count growth has been negative there, Easterbrook said, noting that the “uncertainty of trade discussions” has hit the market and consumer confidence in China.

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