McDonald’s profits tumble, shifting focus to value amid US economic woes

The coronavirus pandemic took a bite out of McDonald’s profits and the Big Mac maker said on Tuesday, July 28, it plans to focus on affordability in upcoming marketing campaigns as United States consumer surveys reveal mounting recession fears.

But while there is still a lot of uncertainty because of COVID-19, executives expect the 2nd quarter to be the low mark for the year. 

The fast-food company suffered a 68% drop in profits to $483.8 million, but the impact was mitigated somewhat by drive-through sales that are becoming a bigger factor, including in European markets.

Chief executive Chris Kempczinski cautioned that there are “a lot of warning signs out there that would suggest the consumer sentiment and consumer concerns about the economy is negative and going in the wrong direction.” 

“The vagaries of the pandemic create an unpredictable operating environment,” he said on a conference call with analysts.

“In many markets around the world, most notably the US, the public health situation appears to be worsening.” 

The chain saw revenues plunge 30% to $3.8 billion, but he added that the 2nd quarter would likely be the “trough in our performance.”

Comparable sales tumbled throughout major markets for the fast-food giant, but the US outperformed other regions because of drive-through and takeaway service that continued even where in-restaurant dining service was stopped.

‘Marketing war chest’

The company had trimmed back its advertising spending in the 1st half of 2020, but had amassed a “marketing war chest” that it would use the rest of the year.

“It’s time for us to get back on the front foot,” he said. “But it also means that were going to be thinking about the role affordability and value can play.”

Kempczinski said McDonald’s most recent poll showed “economic concerns eclipse public health, public safety concerns.” 

He did not elaborate on the plan to emphasize value, but the company has often had special combo promotions of a drink, a hamburger, and fries at reduced prices, as well as a $1 menu.

Kempczinski also said sales were boosted by US fiscal spending, including the $600 a week in additional unemployment payments that are due to expire this week.

Republican lawmakers late Monday, July 27, unveiled a $1-trillion support package that slashes additional jobless benefits to $200 a week from $600, setting up a fight with Democrats who are pushing for a bigger package that would maintain the higher support.

The McDonald’s chief said he was not able to “parse” the impact of such a reduction in unemployment benefits on US sales, but said that fiscal support had been an important cushion.

“I think our expectation would be that for the same reasons that it was stimulative when it was first put in, there would be some negative implication if it were to roll off,” he said.

Resilient sales

But McDonald’s business “tends to be pretty resilient, whether it through recessionary times, or through times of growth.” 

Sales improved throughout the quarter in the US and in some international markets as governments lifted lockdown restrictions and more activity resumed.

About two-thirds of sales in European markets now come from drive-thru service, up from one-third prior to the pandemic, said chief financial officer Kevin Ozan.

The company has changed about 50 operating procedures in the US to employ social distancing and provide employees with face masks and other personal protective equipment.

It announced last week that it will require customers to wear face masks starting August 1 as it paused additional dining room reopenings in response to the US coronavirus outbreak.

Shares in the golden arches fell 2.5% to $196.24. – Rappler.com