McDonalds: 4th Quarter shows They are Solid for the Long Run

This was originally written for Gerson Lehrman Group

Summary:

1) McDonald's Profit is up VS last years Quarter 4 in a difficult environment

2) Discounting by other chains feed into a "Value War" McDonald's is likely to win

3) McDonald's is positioned for long term revenue and profit growth



Analysis:

Strong Quarter
McDonald's reported a quarter where they managed to earn $1.22 Billion dollars with it's home market, the US, being one of the weakest performing parts of the business. The US economy has high unemployment and aggressive price competition occurring from other large players, so McDonald's had a challenging environment to cope with here at home. New initiatives like the McCafe coffee line and the upscale "Angus burger" widened out the menu appeal to consumers who might not be regular McDonald's consumers.

Value Leaders
McDonald's has been entrenched in the "Value" portion of the business for roughly
3 years now, and the McDonald's operational model can sustain this for as long as competitors want to come into the "$1.00 item" arena.

McDonald's has been the driver of "Value" in the QSR Sector, and has consistently offered a good variety of products at the Value level. This has played well in the challenging economic environment of the US, and has forced other players to come in with items to compete at that price point, with Burger King now actively advertising their "Double Cheeseburger" after having steered largely clear of price-oriented competition. McDonalds has cost control and marketing message in the value arena down to a science, and while others may come and try, it seems unlikely they can be dislodged either operationally or perceptually as the value leaders.

Long-term outlook: Good
This shows McDonald's is positioned for long-term revenue and profit growth. When the US recovery hits full swing, McDonald's seems likely to be a prime beneficiary of the increased employment and more confident consumer a recovery will bring, adding strength to strong international results. McDonald's wasn’t afraid to become a "Pricer" early in the down cycle, and has managed that initiative to position itself for greater growth down the road.

Convenience Not Inconvenience

This was the lead Story in the January 25, 2010 Edition of Condevco's "Meter" Newsletter

Darcee and I were in Pittsburgh over the Christmas Holiday, to spend the Holidays with our extended families. While the circumstances aren’t important, we ended up at about 2:00PM on Christmas Day in a borrowed car heading for a visit. The snow was falling lightly and we Floridians were cold!!

We were hungry and knew our Christmas dinner wasn’t scheduled until about 6:30 that night. We were out in a rural area, no fast-food was around. So, we stopped into a convenience store to see what we could get to tide us over. Not one of the great chains that operate around Pittsburgh; no Sheetz or GetGo was close enough. As we pulled into the little store with two dispensers and 4 parking spots, we weren’t feeling too optimistic about our prospects. Maybe some Twinkies and a Slim Jim...

And, we walked into what the best of convenience can be! Two nice ladies were staffing the store, the one behind the counter dressed as Santa Claus, and freshly made and packed sandwiches (and good!) were in the cooler case for $2.99 each. The other employee offered us cookies from a tray one of her friends had just brought in! The store was clean, the staff was friendly , and it really affirmed what our business is all about.

They made working on Christmas into a gift and not a chore. You couldn't train what was going on there, just nice people who were doing the task they had to complete to the very best of their ability.!

Cumberland Farms Subsidiary Gulf Oil Acquires Brand Rights for Entire U.S.

Gulf Oil L.P., a wholly owned subsidiary of Cumberland Farms Inc., Is ready to make a significant geographic brand expansion now that the company has acquired all rights, title and interest to the Gulf brand in the U.S. The Gulf brand has been in existence for almost 110 years. For the last 20 years, Gulf-branded gasoline in the continental U.S. has only been available in an 11-state region in the Northeast through a licensing agreement between Gulf Oil L.P.'s parent company and Chevron U.S.A. Inc., according to a news release. The Cumberland Farms subsidiary now controls the right to market the brand throughout the United States and its territories. This acquisition enables Gulf Oil to expand its use of the Gulf brand throughout the U.S. for the first time since it first acquired certain rights to the brand in 1986, the company stated.

Framingham, Mass-based Gulf Oil currently distributes motor fuels through a network of more than 2,000 branded gasoline retail centers and 12 proprietary oil terminals.

With Gulf Oil already supplying roughly 10 percent of the retail fueling stations in its 11-state market region, the petroleum marketer and subsidiary of Cumberland Farms Inc. was approaching saturation -- and feeling some geographic constraints. But with the acquisition of all rights, title and interest to the Gulf brand in the U.S. from Chevron Corp., the fishbowl just became much larger for the company.

For the last 20 years, Gulf-branded gasoline in the continental U.S. has only been available in an 11-state region in the Northeast through a licensing agreement between Gulf Oil L.P.'s parent company and Chevron U.S.A. Inc. The new deal, which became effective Jan. 12th between Chevron and Gulf gives the Massachusetts-based company the right to market the brand throughout the United States and its territories, enabling Gulf Oil to expand its use of the Gulf brand throughout the U.S. for the first time since it first acquired certain rights to the brand in 1986, the company stated.

Looking to add Orphaned Chevron Mid-Atlantic Sites
While Gulf Oil wanted the rights to the mark when it began an overhaul of the brand in 2005, it was when Chevron announced its decision to pull out of 10 mid-Atlantic markets in late 2009 that the pieces fell into place for Gulf to expand its agreements with the major oil company. Gulf decided they wanted to purchase the rights to market the brand in the states where Chevron had announced it was pulling out, and it eventually progressed to the national marketing acquisition.

Super Jobber on the Way?
As for the immediate future, Gulf is looking to pick up stations that lost the Chevron brand in those mid-Atlantic states. It’s a natural extension of the current market area. Gulf has no terminals in that region currently. Primarily, it will focus on the distribution channel in the area to fuel its network growth, rather than real estate or company-operated locations, he added. Gulf is seeking well established, tenured distributors in the new markets it is entering.