McDonald’s has forecast relatively flat full year earnings. Following less than stellar sales performance news from Burger King and Wendy’s, McDonald’s expects to do little better. While growth in fast food has been slow, the ‘fast casual’ segment has been going strongly in recent years. McDonald’s should put renewed focus on its acquisitions, including Chipotle and Pret A Manger, to drive growth in the near future.
McDonald’s sent a mixed message on Wednesday, announcing it expects Q3 earnings to exceed Wall Street estimates while maintaining its forecast for “relatively flat” full-year earnings before the impact of a strong US dollar.
The fast food chain said that earnings for the third quarter, expected on October 22, will come in at 41 to 42 cents, compared with 41 cents a year earlier. The results will include a $137 million after-tax gain related to the initial public offering of McDonald’s Japan and a $100 million after-tax charge related primarily to about 160 restaurant closures.
The announcement has fuelled concerns that the company may make staff redundant by announcing cost-cutting plans. Although McDonald’s refused to comment on the rumors, franchise owners are expecting the company to reduce the number of US operating divisions from five to two or three, downsizing the corporate headquarters in Oak Brook, Illinois.
Like its top competitors – Burger King and Wendy’s – McDonald’s is feeling the impact of consumer concern over obesity, livestock scares in Europe and the slowing economy. Diageo recently reported that sales at Burger King are continuing to deteriorate, with worldwide comparable restaurant sales and operating profits declining by 4% and 12%, respectively.
Despite a slowing economy that may curb spending among cash-conscious consumers, the relative affluence of the past decade has created a culture in which consumers seek to gain status through food consumption. While upscale eateries may suffer, the mid-priced ‘fast casual’ segment is poised for growth, even in light of an economic downturn, as consumers continue
striving towards projecting at least the image of wealth.
While McDonald’s cannot abandon its core brand, diversification into other food products and new restaurant formats will be the key to maintaining financial robustness in the coming months. The recently acquired Mexican restaurant chain Chipotle, Donato’s Pizza, Boston Market and sandwich bar chain Pret A Manger, as well as McDonald’s new McCafe format, all represent potential growth areas and should be fully exploited.
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