Big Mac Makeover Helps McDonald's Overcome Restaurant Slump

April 25, 2017 09:22 AM
 
McDonald's Big Mac Burger

A revamp of McDonald’s iconic Big Mac burger and more aggressive drink promotions are helping the restaurant giant overcome a broader slump in the fast-food industry.

The chain posted a surprisingly strong gain in same-store sales last quarter, with the measure growing 4 percent globally. Analysts had estimated a 1.3 percent rise. Earnings also topped projections.

The results suggest that Chief Executive Officer Steve Easterbrook got a payoff from efforts to overhaul the company’s menu. He rolled out different sizes of the Big Mac and offered $1 and $2 drink deals, a bid to attract customers in a cutthroat U.S. restaurant environment. A switch to all-day breakfast in the U.S. in 2015 also continues to fuel sales.

Big Mac Breakthrough

“U.S. sales showed a nice acceleration in the quarter,” said Michael Halen, an analyst at Bloomberg Intelligence. “They’ve made a lot of positive changes over the last two years, and all of these positive changes are starting to add up.”

Shares of McDonald’s Corp. rose as much as 3.6 percent to a record $139.09, the biggest intraday increase in five months. Through Monday’s close, the stock had climbed 10 percent this year, outpacing the Standard & Poor’s 500 Index’s 6 percent gain.

The Big Mac strategy represents a case of getting playful with a well-known product and not irking customers in the process. PepsiCo Inc. wasn’t so fortunate when it reformulated Diet Pepsi in 2015, a move that led to a consumer backlash. And Coca-Cola’s launch of “New Coke” in 1985 is considered one of corporate America’s most legendary failures.

McDonald’s now serves the Big Mac in three sizes: the traditional version, a larger Grand Mac and a smaller Mac Jr.

U.S. same-store sales rose 1.7 percent last quarter, an unexpected gain. Analysts projected a 0.8 percent drop. Earnings amounted to $1.47 a share in the period, handily beating the $1.34 estimate of analysts.

Delivery Push

The company also is looking to delivery services and more digital options to help attract diners. It hasn’t been easy. U.S. competitors are advertising steeply discounted food, along with new fare. Industry same-store sales fell 0.6 percent in March, slipping for the fourth straight month, according to MillerPulse data.

McDonald’s also performed well in overseas markets, which provide about two-thirds of revenue. Same-store sales at its high-growth division rose 3.8 percent, topping the 2.7 percent estimate. That segment includes China, where the chain is opening new locations to better compete with Yum China Holdings Inc.’s KFC and Pizza Hut brands.

Its so-called international lead markets climbed 2.8 percent by that measure, driven by strong results from the U.K. and Canada. New fare has attracted diners in the U.K., while the chain has been working to improve its customer service at Canadian locations.

McDonald’s total revenue was $5.68 billion last quarter, compared with the average projection of $5.53 billion. Some of the gain may have come at the expense of other restaurant chains, including Sonic Corp. and IHOP, Halen said.

“They could be stealing traffic,” he said. “There’s no doubt things are looking up for McDonald’s.”

To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net, Lisa Wolfson

©2017 Bloomberg L.P.

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