McDonald's All-Day Breakfast Push No Longer Fueling Growth

January 23, 2017 10:17 AM
 
McDonald's Breakfast

All-day breakfast is beginning to lose its novelty for McDonald’s Corp.

When the company’s U.S. restaurants started serving Egg McMuffins and other morning fare at all hours in 2015, the change elated customers and fueled a yearlong sales surge. But now the effect is waning: While overall earnings beat analysts’ estimates last quarter, domestic same-store sales fell 1.3 percent.

The slowdown from all-day breakfast leaves McDonald’s in search of its next big source of U.S. growth. The company is looking to technology, such as touch screens and mobile ordering, to help fuel domestic sales. But it’s not clear how quickly that will pay off, said Michael Halen, an analyst at Bloomberg Intelligence.

“We still don’t know where the sales are going to come from,” he said. “People are in wait-and-see mode.”

McDonald’s shares fell as much as 2 percent to $119.82 on Monday after the results were posted. The stock gained 3 percent last year.

The picture was brighter overseas. Globally, same-store sales rose 2.7 percent, topping the 1.4 percent gain predicted by analysts. Profit was $1.44 a share in the period, compared with an estimate of $1.41.

Cooling Off

In some markets, including the U.K. and Germany, McDonald’s is further ahead with technology upgrades such as self-service kiosks. Sales in the company’s “international lead markets” segment, which includes those key countries, rose 2.8 percent in the fourth quarter. McDonald’s generates about two-thirds of its revenue outside the U.S., and the company has said its turnaround effort is further along aboard.

McDonald’s has said it plans to accelerate its technology spending. The investment will help fund new self-serve kiosks at U.S. restaurants and expand a smartphone ordering app across its 14,000 domestic locations, starting this year. The company has lagged behind competitors on the technology front. Starbucks Corp. and Dunkin’ Donuts boast millions of rewards-program members, while Taco Bell allows diners to order via mobile app. Those types of programs frequently allow restaurants to lock in customers.

‘Challenging Comparison’

Chief Executive Officer Steve Easterbrook embarked on a turnaround at the world’s largest fast-food chain when he took the helm two years ago. Expanding breakfast -- a longtime request of customers -- was a key part of the strategy, and it helped pull McDonald’s out of a domestic sales slump last year. But the sales bump has waned.

The company blamed its U.S. sales decrease in the fourth quarter on the “challenging comparison” with the all-day breakfast boost it got a year earlier.

McDonald’s also has worked to improve its food quality, a bid to appeal to a new generation of American diners. That includes removing artificial ingredients from popular items on its menu, eliminating preservatives from chicken nuggets and nixing high-fructose corn syrup from its buns. In other moves, McDonald’s declared its chicken antibiotic-free in the U.S., added real butter to its breakfast muffins and pledged to use cage-free eggs.

But McDonald’s still faces an industrywide restaurant slowdown, bringing pressure to lower prices and offer more aggressive promotions. The breakfast change alone isn’t enough.

“It was a bad quarter in the industry,” Halen said.

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