Saturated Fat: McDonald's to Revisit 'Dollar Menu'; Reflections on Same Store Sales and Commercial Real Estate

McDonald's is facing lean times, not just in the US, but globally.

Earlier this year, McDonald's shifted from a 'Dollar Menu' to an "Extra Value Menu" which Chief Executive Don Thompson said didn't "resonate as strongly" with consumers.

One reason? There was no value in it, except for McDonald's.

The Wall Street Journal reports Amid Falling Profit, McDonald's to Revisit 'Dollar Menu'

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.

"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.

Wall Street analysts were expecting an increase in per-share profit for the quarter, not a decline.

"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.

Saturated Fat

The entire fast food industry is loaded with saturated fat. I am not talking about the food itself (which of course much of it is fat and nutritionless carbs), but rather the sheer saturation of restaurants everywhere you look, all competing for the same customers.

Over the years, I have frequently asked a question that goes something like this: "How many more Pizza Huts, McDonald's, nail salons, WalMarts ... do we need?"

My conclusion long ago was not many. Nonetheless, stores kept going up. And as long as they were, they hired workers (even if most of them were part-time).

Reflections on Same Store Sales 

Now what? Now cannibalization of same-store-sales from each other is the norm.

With part-time jobs becoming more-and-more the norm (for a detailed discussion, please see Obama Slashes Four Hours Off Definition of "Full-Time" Employment), with kids graduating from college with no jobs but monstrous debt, and with boomers retiring with insufficient savings, where is the store growth going to come from?

Heck, where are customers going to come from to support existing stores?

McDonald's cautioned 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.

With cannibalization and intense competition the norm, with stores everywhere you look, is it any wonder companies are struggling with same store sales? I think not (and I am talking industry-wide, not just McDonald's). Actually, the only wonder is why this did not happen before.

Commercial Real Estate

Here are some questions to ponder: Where else is there to build, that makes sense to build from a risk-reward scenario? Will more stores result in more jobs or will cannibalization of jobs follow cannibalization of customers? What about store overall profit levels?

I think the answers to those questions are pretty obvious. One only need think of the questions to have serious doubts about job and earnings growth going forward.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com