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McDonald's misses profit target as competition delivers breakfast, plant burgers

Stock MarketsOct 22, 2019 02:04PM ET
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© Reuters. FILE PHOTO: A McDonald's "PLT" burger with a Beyond Meat plant-based patty at one of 28 test restaurant locations in London, Ontario

By Aishwarya Venugopal and Hilary Russ

(Reuters) - McDonald's Corp (N:MCD) missed Wall Street estimates for profit for the first time in two years on Tuesday as more investment to spruce up U.S. restaurants and speed up service weighed on the world's biggest fast food chain, sending its shares down 4%.

Rival fast-food chains in the United States have challenged its dominance with value meals and new menu items, including plant-based burgers and meat substitutes launched by rivals including Restaurant Brands International Inc's (TO:QSR) Burger King and Yum Brands Inc's (N:YUM) KFC. McDonald's is seen late in reintroducing chicken sandwiches and rival Wendys Co (O:WEN) has started serving breakfast.

In the face of declining customer traffic, McDonald's has been remodeling its 14,000 U.S. restaurants to include digital ordering kiosks, mobile ordering as well as pay-and-pickup services, while partnering with app-based delivery services GrubHub Inc (N:GRUB), Uber Eats (N:UBER) and DoorDash.

Those investment led to a 2% rise in operating costs to about $3 billion, leading McDonald's to post a smaller-than-expected profit of $2.11 per share versus an average estimate of $2.21, according to IBES data from Refinitiv.

"The world is different than it was in 1955," Chief Executive Officer Steve Easterbrook said during a call with investors.

"We're keenly aware we have to be ahead of these changes, investing, executing and growing with a deep sense of urgency and purpose," he said.

U.S. traffic was negative - an industry-wide trend expected to continue through the end of the year, especially due to weakening economic conditions, according to TDn2K research.

Sales at U.S. restaurants open for at least 13 months rose 4.8% in the third quarter ended Sept. 30, below the 5.17% growth expected by analysts, according to Refinitiv data.

"Our gut tells us that McDonald's was outcompeted in the third quarter by Wendy's and Burger King," Cowen analyst Andrew Charles said in a note.

Despite the U.S. miss, Bernstein analyst Sara Senatore said sales "continue to be among the best in the industry" and that benefits from store renovations should build in future quarters.

Globally, the company reported better-than-expected comparable sales growth of 5.9% on strong performance in markets such as the UK and France.

Interest in plant-based burgers has jumped in North America, and consumers have been waiting to see if McDonald's will expand its test of a Beyond Meat Inc (O:BYND) burger in Ontario, Canada, to the United States and other markets.

Easterbook gave no clues other than saying they were interested in such products and wanted to get the flavor and marketing right.

"What we're interested in is really how best to position this, get a sense of the flexitarian customer," he said, referring to people who eat mostly, but not entirely, vegetarian diets.

Net income fell 2% to $1.61 billion in the quarter from $1.64 billion a year earlier.

Total revenue, including both U.S. and overseas operations, rose to $5.43 billion, slightly below analysts' expectations of $5.49 billion.

The company also expects selling, general and administrative expenses for 2019 to rise between 1% to 2% excluding the impact of currency fluctuations.

McDonald's expects delivery to drive $4 billion, or roughly 4%, of global sales.

The service is now available from about 23,000 McDonald's restaurants in over 80 countries. On average, guests spend twice as much on delivery orders as they do on in-store checks, Easterbrook said.

"Delivery remains a big frontier for our business, and we still have a long way to go," he said.

McDonald's misses profit target as competition delivers breakfast, plant burgers
 

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Dennis Richards
Dennis Richards Oct 22, 2019 1:07PM ET
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McD's forgot the Ray Kroc guiding principle, KISS, Keep it simple stupid.  They need to drop the over priced supposed higher end sandwiches that are nothing short of garbage.  The idea, of course, was these higher end sandwiches would drive profits, they did not as the quality was and is poor.  Overall the food is grossly over priced and far under quality.  Even their basic cheeseburger is just plain nasty.  Customer service is nothing short of laughable at McD's.  The order takers would imrpove if they were clean and smiled and most of all were polite.  McD's is their own worst enemy.
Dennis Richards
Dennis Richards Oct 22, 2019 1:02PM ET
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McD's food is bad and getting worse.  They ahve too many items on the menue that simply are intended to be profit makes with the false illusion of quality.  Remember the Ray Kroc guiding principle, "KISS, Keep it simple stupid."  Slime the menu down, improve quality and customer service.
Andrew carson
Andrew carson Oct 22, 2019 12:03PM ET
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They raised prices too much.
Adam Brand
Av8er31 Oct 22, 2019 11:38AM ET
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I personally stopped eating at mcdonalds cause they are too expensive. The king has much better deals, and much better food/price value. McDonalds is trying to be the high end of junk food, it won't end well.
Andrew Paeth
Andrew Paeth Oct 22, 2019 8:51AM ET
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They need to go back to offering cheaper loss leaders to drive soda and coffee sales.Breakfast sales have plummeted and the buy one get one for a buck is a joke. No one wants to pay $4 for a small-greasy breakfast sandwich that costs maybe 75 cents with labor to produce.
Daniel Stiglitzplatz
Daniel Stiglitzplatz Oct 22, 2019 8:51AM ET
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Tried there McBagel a few weeks ago. All psyched cause I got a coupon for a freebie and it looked tasty with the lettuce and tomato on it in the ad. But when I actually bought it there was no lettuce and no tomato. Compared to other breakfast joints they are falling behind. It wasn't that great a product and I wouldn't go back for that item (even with a coupon) as the competition's similar product is waaaayyyy better.
roy satterwhite
roy satterwhite Oct 22, 2019 8:35AM ET
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McDonald's quarter pounder tastes good. I'll never eat a plant-based burger
 
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