For the third quarter ended September 30, McDonald's reported [image-nocss] profit of $1.4 billion, a 10% jump, as sales in every global sector increased. Total revenue rose 4%, to $6.3 billion. McDonald's same-store sales rose 6% worldwide and 5.3% in the United States in the third quarter. Meanwhile, the rest of the industry has continued to struggle. Visits to major fast-food chains increased just 1% from June through August, while the hamburger category as a whole was flat, according to the report, citing NPD Group.
McDonald's has managed to stay above the fray, said the report. In the United States, the chain has cited its frappe and smoothies as a reason for increased sales. And McDonald's is hoping to build buzz with its McRib sandwich and will launch oatmeal with dried fruit early next year.
Consumers have been eating out less during the recession, and most experts do not expect restaurants to fully recover anytime soon. In 2009, the restaurant industry posted its worst year in a generation. And while NPD expects restaurant visits for 2010 to increase 1%, that is up against soft comparisons.
McDonald's has been widening the gap between itself and the rest of the hamburger competition. In 2009, the chain's U.S. sales accounted for nearly 9%, or $31 billion, of the total restaurant industry, according to the report, citing restaurant-industry consultancy Technomic. McDonald's accounted for 48% of hamburger segment sales in 2009, with Burger King and Wendy's in second and third place with 14% and 13%, respectively.
McDonald's CEO Jim Skinner cautioned against taking the company's earnings leap as a sign that the economy is improving or that consumers are eating out more. "The recovery, we think, is going to be elongated in America," he said on a call with investors following the company's earnings report, according to the Tribune.
He cited declines in consumer confidence in September and noted that unemployment is close to 10% and not expected to drop significantly over the next year. "And so we've got a long way to go there, relative to consumer confidence and that confidence of people being able to put food on their table at home or away from home."
That is a big reason to fear "the refrigerator."
"During the last economic downturn...we started to look also at food at home, what's going on at the grocery stores," McDonald's CFO Pete Bensen said during the call. "As [President Don Thompson] likes to say, 'The refrigerator is starting to become a big competitor of ours'."
The company monitors grocery sales, in part to understand how much it can raise its own prices. "So we will be keeping an eye on what's going on both at the grocery stores and in the competitive market as we look at our pricing," Bensen said.
(Late last week, McDonald's said it plans to raise menu prices to blunt higher costs, including its first such increase in the U.S. in more than a year, reported The Wall Street Journal. The company expects to increase prices in the United States and Europe amid projections that commodity costs will rise between 2% and 3% in 2011, Bensen said during the conference call.
Timing and executing price increases can be tricky as McDonald's and other companies are caught between paying more for key materials such as meat and wheat, and keeping prices low to attract price-sensitive customers in a still-weak economy. McDonald's said it has the pricing power to pass on some of those costs.
McDonald's last raised prices at its U.S. stores in late 2009. Profits since then have been bolstered by the sales of higher-margin items such as the blended-ice smoothie and frappe drinks, allowing McDonald's to withhold raising prices on other items.)
Ron Paul, president of Chicago-based Technomic, told the Tribune that the chain is probably looking at the grocery sector to capture new customers and defend existing business. "There's no question food retailers like Trader Joe's, Costco and Whole Foods are all looking to get dollars away from the restaurant industry," he said. "They can't necessarily do it with a Quarter Pounder, and they don't have drive-through...so they're not in a good position to capture a McDonald's kind of meal."
Restaurants are at the most risk, Paul said, when consumers need to visit a grocery store just before grabbing takeout for dinner. "Let's say it's dinnertime, and you've got to stop at the grocery store anyway," he said. "You're not going to pick up a burger and fries, but you can pick something up," such as lasagna or pizza.
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