McDonald’s Profits Flat as New Competitors Enter Market

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McDonald’s saw flat fourth-quarter earnings and a dip in overall sales due to new competitors entering the fast food markets where the hamburger giant has dominated for years. Unchanged from a year ago, McDonald’s reported 1.4 billion in sales in the fourth-quarter. Stock earnings for the company rose just $1.40 per share – only a penny above expectations from analysts.

Even though McDonald’s has sales that are around seven times more than Burger King and Wendy’s combined, McDonald’s overall sales were down as they faced a decline in customers, even though the company saw that the amount spent per customer increased. The decline is attributed to new competitors entering the market where it has been dominated by the “Golden Arches” for years. New competitors have not been traditional fast food establishments; non-traditional market players such as conventional food markets and even coffee shops have emerged as viable alternatives to fast food establishments.

Consumer caution has emerged as the massive fast food retailer has a loss in net profits, which has depressed the market for dining outside of consumers’ homes. Although the global fast-food retailer has over 35,000 locations in 100 countries, fourth-quarter comparable sales dropped 0.1% in 2013. Don Thompson, President and CEO of McDonald’s, stated that the predicted sales for January would remain unchanged. As well, McDonald’s stated in their yearly end filing that given persistent cost pressures, 2014 will be expectedly challenging.

McDonald’s suffered a U.S. sales decrease of 1.4 percent. Overseas comparable sales fell even lower in the fourth-quarter – down 2.4 percent in the Middle East, Africa, and the Asian-Pacific regions. Nevertheless, European sales were up over 1 percent with better than expected sales in Russia, England, and France. Total net sales for the company was $28.1 billion, showing around a 2.2 percent increase from 2012 which ended the year at $27.6 billion. As well, revenue rose $100 million from last years $5.5 billion, to $5.6 billion at the end of 2013. Even with a number slightly better than the previously year, flat profits reported by McDonald’s have been caused by new competitors entering the market.

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McDonald’s stated that the company is going to step up efforts to remain “relevant” to customers, focusing on better and more efficient customer service and marketing strategies. Tim Fenton, McDonald’s COO, explained that the company is now in battle over market share against newcomers into what was previously a stable majority market share for the fast food giant. “It’s a street fight and we’re getting at it,” he said. Fenton also stated that the company has learned from mistakes in 2013 such as an extensive, overcomplicated menu and introducing too many new items at one time.

The company’s new strategy for customer retention is to simplify and stabilize its menu. As well, they are upgrading the kitchens in its global restaurants in order to boost employee productivity. McDonald’s will also experiment with adding more options regarding condiments and add-ons to better satisfy its customer base and reach out to new ones.

Investors have been disappointed by the decrease in sales and profit from the world’s largest chain restaurant. Since Thompson took over as President and CEO 18 months ago, he has diversified menus and changed management. However, his vision of growing the company and increasing sales have not come to fruition. As consumers look for faster food at cheaper prices, non-traditional means for serving them will surface to grab a bite of the current market share. McDonald’s is attempting to make its company more efficient and searching for novel ways to evolve in the ever-changing fast food market. 2014 is the next step for the fast-food restaurant industry to reanalyze consumer demand as McDonald’s will battle against new competitors in its majority share market.

By: Alex Lemieux

Sources:

Economic Times

The New York Times

Japan Today

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