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Tuesday, October 21, 2014 8:34 PM

McDonald's Revenue Declines 30%,Vows Fresh Thinking; Mish Offers Some Advice

A 30% decline in revenues for McDonald's is quite startling to most. I wonder why too so long. In response McDonald’s Vows Fresh Thinking.

McDonald’s Corp. outlined plans for what it called fundamental changes to its business as it reported one of its worst quarterly profit declines in years, driven by problems in nearly every major part of its business.

The 30% decline in net income for the period ended Sept. 30 was the latest in a string of disappointing results for the world’s largest restaurant chain. It is struggling with weak sales in Asia, Europe and, most important, its home market in the U.S.

In the U.S., an increasingly complicated menu has slowed service and McDonald’s once reliable base of younger customers have defected to fast-casual chains boasting customized ordering and fresh ingredients, including Chipotle Mexican Grill Inc., and specialty-burger places such as Five Guys.

McDonald’s has focused so far on efforts including increased staffing at busy times, and has shaken up its management ranks, including replacing the head of its U.S. business for the second time in less than two years. But the changes have yet to boost sales or profit.

The 4.1% decline in McDonald’s September U.S. same-store sales marked the worst monthly U.S. same-store sales performance since February 2003.

In response, McDonald’s Chief Executive Don Thompson on Tuesday said it would simplify its menu starting in January, in part to remove low-selling products, and plans to give the company’s 21 domestic regions more autonomy in rolling out products that are locally relevant.

By the third quarter of next year, McDonald’s also plans to fully roll out new technology in some markets to make it easier for customers to order and pay digitally and to give people the ability to customize their orders, part of what the company terms the “McDonald’s Experience of the Future” initiative.

“The key to our success will be our ability to deliver a more relevant McDonald’s experience for all of our customers,” Mr. Thompson said. “Customers want to personalize their meals with locally relevant ingredients. They also want to enjoy eating in a contemporary, inviting atmosphere. And they want choices in how they order, choices in what they order and how they’re served.”
Advice for McDonald’s

  1. Serve better food
  2. Let customers have it the way they want it
  3. Let customers have it when they want it

McDonald’s is nearly hopeless. On many occasions while traveling, I have chosen to not eat at all rather than eat at McDonald's. It happened just this past weekend.

Don't want McDonald's "special sauce" (I fail to understand why anyone does), and you have to wait an extra 5 minutes (at least) to get it your way.

In contrast, Wendy's has some nice salads and a very good chicken sandwich.

The one and only thing I like at McDonald’s is their breakfast sandwiches. They may not be healthy, but at least they are very tasty.

If McDonald’s would offer breakfast 24 hours a day I would eat there more often. Instead, if you walk in one minute past breakfast time you cannot get breakfast. That has happened to me on many occasions.

I say "F* McDonald’s" unless I am certain I can get there before their arbitrary breakfast cutoff time which seem to vary by location and day of the week.

My advice for McDonald’s is simple: Forget about "atmosphere", expensive renovations, and ridiculous notions of the “McDonald’s Experience”. Instead focus on serving better food, the way customers want it, when they want it.

Mike "Mish" Shedlock

1:15 PM

James Grant Conference Video: Inflation Expectations, Growth, Policy Problems; Europe Has Become Japan

Here's an interesting video from the recent James Grant Conference. The title of this year's conference is Investing Opportunistically, Separating the Beta from the Alpha.

The first five minutes are introductions and attendee notes you may wish to skip over. The opening speech was by Marc Seidner, CFA at GMO, on inflation expectations.

Note: you may have to click on the play arrow twice to start the video.

Last year at this time a majority thought tightening was inevitable and bonds were attractively priced for those who thought otherwise now, tightening in Europe and Japan is totally priced out and even in the US, inflation expectations are down as noted by forward yield curves.

Seidner commented that 100% of strategists were negative on bonds heading into 2014 but I can name a couple exceptions, notably Lacy Hunt at Van Hoisington.

Lackluster GDP

Tepid Inflation - UK, US, EU, Japan

Historically, when inflation has been this low, talk was of easing further not tightening.

Inflation Expectations

One-Year Inflation Expectations

US Dollar, Euro, Yen, British Pound Forward Curves

"Europe Has Become Japan"

Seidner says that if he was washed up on an island and could periodically see one chart to let him know the state of the global economy the above chart would be the one as it shows interest rates, implied path of monetary policy, and the divergence between the US and the rest of the world.

"From this perspective of the bond market, Europe has become Japan. ... There is an inconsistency in my mind between a path of forward interest rates that Europe that reflects such slow economic growth that interest rates never get off zero-bound... that there will be enough growth to enable high-debt countries to delever safely is a complete inconsistency," said Seidner.

James Grant on Price Discovery and Inflation

James Grant takes the podium at about the 25 minute mark with a joke about the title of his publication, Grant's Interest Rate Observer.

Grant asked for sympathy for his business model, because "Ladies and gentlemen, we have no interest rates. We used to have them and they were swell. Some of your parents may have lived off them."

Grant complained about PHDs with no real world experience running things. He properly noted “Interest rate suppression is price control by another name.”

"Can prices even be measured?” asked Grant? I think not, and have stated so many times.

Grant stands up to the “universal notion that prices ought to rise and if they don’t rise something is wrong. I read the most extraordinary thing in the Financial Times the other day. It said that the failure of prices to accelerate meaningfully in this lame recovery was a dark cloud over the world’s economy.

Dark cloud? Dark cloud?” asked Grant.

The world has come to accept the notion that prices must go up and need to go up, yet Grant cites numerous periods in US history where prices fell and there was no panic and no problems. Notably, prices fell for 25 years in the final quarter of the 19th century reflecting the progress of the age.

Grant challenged Fed Chair Janet Yellen to "please explain the difference between progress on one hand and deflation on the other".

Two days ago, I wrote Challenge to Keynesians "Prove Rising Prices Provide an Overall Economic Benefit" also in response to an article in the Financial Times.

I had not yet seen the above video, and I am pleased to be of the same mind as Grant: There is no economic benefit to rising prices.

Grant concluded with the idea "Gold is the anti-debt. It is money that cannot be conjured on a computer screen. It is that money that has no counterpart on the balance sheet of a central bank indicating that it's a liability.  It's money pure. It's out of favor.  So we at Grant's continue to carry a torch for gold."

Mike "Mish" Shedlock

Monday, October 20, 2014 4:23 PM

M&A Deals Fail At Highest Rate Since 2008

In yet another potential market topping sign, M&A Deals Fail At Highest Rate Since 2008

The value of deals that fail to complete has reached its highest level since 2008, in the latest sign that the best year for mergers and acquisitions since the financial crisis will also feature a number of high-profile failures.

Three large deals collapsed last week, adding to the list of wrecked deals and coinciding with a sharp jump in equity market volatility that sapped confidence in stocks and put a chill on the market for initial public offerings.

The biggest blow to dealmaking prospects came as US pharmaceutical group AbbVie unexpectedly dropped its support for a $55bn takeover of UK rival Shire. The sudden U-turn has undermined the prevailing belief among bankers that a US Treasury crackdown on deals that allow US companies to lower their tax obligations by moving abroad would have little impact.

So-called tax inversions have featured prominently in this year’s resurgent M&A market accounting for at least a dozen deals. But the chances of Pfizer, the US pharma company, reviving its $120bn pursuit of the UK’s AstraZeneca have been greatly diminished as a result of AbbVie’s decision, several people close to the situation recently told the Financial Times, casting doubt on the year’s biggest withdrawn deal returning.

A total of $573bn worth of deals have been withdrawn, setting this year up to surpass the $640bn in deals that went uncompleted in 2008, according to Dealogic.

Bruce Embley, partner at Freshfields, said: “It’s slightly unusual to have an M&A cliff coming without also seeing an adverse impact on equity capital markets. So I wonder if we look back on this moment as an anomaly or whether it is the start of something more volatile.”
Deals Withdrawn or Doubtful

Mike "Mish" Shedlock

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