Sunday, October 21, 2012

McDonald's ... When the Going Gets Tough, The Tough Get Going ... Good News for Fast Food Customers

Consumers are tough to please these days. As a result, many retailers are having to cut prices to get much needed sales.That price cutting in turn creates "more bang for the buck" for the buyer and a downward profit spiral for sellers.

When the general economy is strong, customer demand is healthy and all's well. But when recessions occur and customer demand weakens, as in difficult economic times like today's, price cuts occur as businesses fight for market share. Although that's tough for business, it frequently makes consumers happy.

A downsizing economy is the opposite of the "rising tide lifts all boats" characteristics of a vibrant and growing economy. In essence, an imbalance of capacity in relation to demand creates a situation where (hopefully temporary) excess capacity results due to the shortfall in demand. Companies try to utilize that capacity by driving more sales through aggressive competitive pricing.

So in addition to the global auto excess capacity we've been writing about recently, we're also witnessing the same thing in lots of consumer based businesses currently, including retailers, hotels and restaurants.

To repeat, when sales are growing due to a strong economy, prices tend to rise, but when business downturns occur, something akin to price wars often take place in an effort to gain greater share. Of course, there's always only 100% of any market, even a declining one, so the weak competitors tend to drop out as the strong survive and become even stronger, at least relative to competition. It then becomes a game of who's gaining "share of the consumer's wallet."

Accordingly, those offering great values at low to moderate pricing usually do better than those higher priced and less competitive businesses. For example, low price retailers like Wal-Mart generally shine on a relative basis during tough times. McDonald's should get relatively stronger as well.

So what's happening at McDonald's today is a little surprising. That's because the company reported a very rare quarterly decline in sales and profits Friday, sending its stock down 4.5% at last week's close of trading.

But that temporary bad news about McDonald's share price is likely to prove to be good news for McDonald's customers as this blue chip company apparently is planning to regain its sales momentum by bringing back its "Dollar Menu."

Such an aggressive pricing  move by the company won't be good news for McDonald's competitors, of course, but it will definitely be good news for customers, both of McDonald's and for those of its competitors as they're forced to react or lose customers to McDonald's.

That's the free market working in a tough economy. In a tough market place, intensified competition benefits customers as those sought after customers determine winners and losers by how they spend or don't spend their MOM. And tough times always separate the best from the rest.

And McDonald's has long been the world's low price value leader in the fast food market place. Amid Falling Profit, McDonald's to Revisit 'Dollar Menu' has the details:

"McDonald's Corp. reported a 3.5% decline in third-quarter earnings as sales slowed more dramatically than expected because of a sluggish economy and a disappointing marketing campaign.

McDonald's predicted its sales and earnings growth will "remain pressured" over the next few quarters by the weak economy, and conceded that it needs to be more aggressive in advertising low prices.

As the world's largest fast-food chain, McDonald's has touted its global scale and mix of both value-oriented and higher-priced menu items as key to enduring tough economic times. But the once-resilient restaurant operator isn't weathering the current market turbulence as well as it did the crisis of 2009 because the downturn is more widespread and competition is closing the gap.

"We face softening demand, heightened competition and rising costs in many of our markets," Chief Financial Officer Pete Bensen said. In a weaker economy, customers tend to stop getting extras like drinks and desserts and premium items like Angus burgers, which all offer higher profits to McDonald's. Plus, they may not go out to eat as frequently. . . .

Chief Executive Don Thompson said McDonald's move earlier this year to shift its marketing focus in the U.S. to the higher-priced and more profitable "Extra Value Menu" from the successful "Dollar Menu" didn't "resonate as strongly" with consumers.

"We're going back to talk of the Dollar Menu," Mr. Thompson said.

He said the chain is losing momentum world-wide, with sales at restaurants open at least 13 months falling so far in October compared with the same time last year. Such same-store sales are a key indicator of restaurant chains' strength, and McDonald's hasn't seen declines by that measure since April 2003.

"It's been very rare that we've ever seen all of our major markets experiencing the impact of these kind of global economies at the same time," the CEO said. The restaurant chain, though, does expect sales for the whole quarter to improve, thanks in part to the debut in December of the McRib sandwich, which has a cult following in the U.S.

The company hopes that focusing attention to its lower prices will attract more customers and gain their loyalty. This way, when the economy starts to improve, McDonald's will have a larger consumer base and more ability to raise prices. That was its strategy during the last recession, and it eventually helped McDonald's outperform competitors. . . .

"Clearly, we'd love to be able to see more sales, and that will come in time, but right now it's about having more traffic and appealing to customers," Mr. Thompson said.

The company has cautioned investors all year that its margins are being hit with the effects of higher food and business expenses, and lower consumer confidence, and that its rivals in the U.S. are turning up the heat with revamped menus and marketing campaigns."

Summing Up

A tough economy often makes for brutal competition.

And intense competition for share of wallet (SOW) is a good thing for customers.

It's the market's automatic way of realigning capacity with demand.

Isn't the invisible hand of the free market a great thing?

So get ready to experience exactly what McDonald's means when it says, "You deserve a break today."

It looks like their customers may be getting such a break real soon.

Thanks. Bob.

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