Saturday, January 30, 2010

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

This was originally written for Gerson Lehrman Group


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


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.

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