McDonald’s U.S. same-store sales decline on weak traffic

McDonald’s same-store sales declined 0.2% in the U.S. last quarter, the company said on Wednesday, as the fast-food giant’s value and marketing challenges led to traffic declines that weighed on sales.

The U.S. performance was the dim spot in an otherwise positive global performance, as company-wide same-store sales rose 1.5%, led by markets such as Germany, Australia, and Japan.

Revenues in the third quarter rose 1% to $7.16 billion, which didn’t meet Wall Street’s expectations, but net income rose 9% to $2.5 billion, or $3.51 per share, which did.

Q3 expectations

The company’s domestic weakness was not surprising. Company executives said in September that they expected negative same-store sales this quarter, because weakness in July and August were too much to overcome.

“We expect September will be positive,” CFO Ian Borden said at the company’s Investor Day presentation. “But I think because of that slower start to the beginning of the quarter, I think we expect the U.S. business will be slightly negative for Q3.”

Value strategy

McDonald’s signaled its sales and traffic weakness in August, when it named Skye Anderson its U.S. president, replacing Joe Erlinger. CEO Chris Kempczinski blamed a host of problems for its weak performance, including too many marketing initiatives and a poor shift in its value offer. That value shift likely cost the chain its share of low-income consumers.

The company has since reconfigured its value message with more temporary offers, which appear to have regained some of that lost traffic. It has kept that push up this month, with a nationwide offer of a Quarter Pounder Extra Value Meal for $8.

It is also looking for a new, permanent value offer to replace an Under $3 menu, which did not resonate with consumers.

McDonald’s indicated that it has been gaining traction with its value messaging of late. “In the U.S., we’re encouraged by improvement as the quarter progressed following our intervention on value,” Kempczinski said in a statement. "We’re focused on building from here, strengthening the business today and investing in the next chapter of growth.”

Digital and bundle offers

On the company’s third-quarter earnings call Wednesday, executives said that more digital offers, such as a $2 breakfast sandwich and free fries with a $1 purchase, lured more members of its loyalty program. Such customers represent 30% of McDonald’s overall customer base.

McDonald’s is currently working to improve its overall value efforts. The company is testing multiple forms of low-priced bundled offers, including a mix-and-match bundle and another fixed-price bundle. Another 4,000 restaurants are offering entry-level bundles before the test is over.

Next plan and cost impact

About 40% of the system has some form of entry-level bundled deal. The company’s goal is to launch the program nationally early next year. “I think there’s very strong alignment around focusing on this entry-level value as being the last piece of the value equation for us that we need to figure out,” Kempczinski said.

McDonald’s has since last quarter announced a sweeping plan, known as Next, that promises to use technology, food, and service improvements to make its restaurants more efficient and customer-friendly.

But those improvements will cost $800,000 per store, much of which will be borne by the franchisees. McDonald’s is investing $8.5 billion to offset those costs, but the company’s recent sales weakness coupled with increases in costs for ingredients such as beef has hurt their profitability.

UPDATE: This story has been updated from its original version to include information from McDonald's third quarter earnings call.