McDonald’s new US menu buzz falls flat

McDonald's...FILE - In this Thursday, July 31, 2014, file photo, a customer walks past a statue of Ronald McDonald on display outside a McDonald's restaurant in Beijing. McDonald's Corp. said Thursday, March 31, 2016, it plans to open 1,500 new restaurants in China, South Korea and Hong Kong as it looks to faster-growing markets to help drive a global turnaround. (AP Photo/Andy Wong, File)©AP

McDonald’s US sales growth slowed in the second quarter, underscoring an fast food industry-wide weakening of demand and raising questions over the longevity of the company’s turnround in its most important market.

The chain posted a 1.8 per cent increase in comparable sales at home during the three months to June, despite a weak annual comparison. The rise is slower than the 5.4 per cent rise in the first quarter and missed consensus estimates from analysts surveyed by Bloomberg for a 3.2 per cent increase.

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The result cements what has been a tough quarter for casual dining and coffee outlets in the world’s largest economy, with companies including Yum Brands, which owns KFC, Taco Bell and Pizza Hut, as well as Starbucks and Dunkin ’ Brands complaining of weak consumer confidence.

It also raises questions about whether the promotional buzz over McDonald’s new menu items, as the cornerstone of its turnround, is beginning to wane, while competition to lure customers via discounts has intensified.

“Broader spending growth is not translating to same-store sales,” warned Jefferies analyst Andy Barish in an industry report on Monday. He added that “the fierce promotional environment and competition from grocery and convenience stores are making it tougher”.

McDonald’s total sales for the quarter dropped 4 per cent to $ 6.27bn as the company sold a portfolio of company-owned stores to franchisees. The sale, which reduces operating costs, helped increase profit margins in its home market, boosting North American operating profits by 10 per cent.

Earnings fell 1 per cent to $ 1.25 a share, hit by $ 230m in one-off charges partly related to its refranchising plan, and the impact of the strong dollar on its overseas profits. Excluding these costs, earnings increased 13 per cent, the company said. Global comparable sales rose 3.1 per cent.

Steve Easterbrook, McDonald’s chief executive, said: “I am confident in our system’s ability to stay the course and execute our turnaround plan to achieve our goals”.

McDonald’s efforts to reduce the number of its store-owned restaurants could help it circumvent another pressure that the industry is facing: higher wages.

It has been the focus of “Fight for $ 15” campaign for higher wages across America. McDonald’s has said it is raising wages at its own stores, but as it sells off stores, the onus to raise wages will fall on to the franchisees.

Jefferies’ Mr Barish said that across the industry restaurants were facing wage inflation in the mid single-digits on a gross basis.

McDonald’s shares were down more than 3 per cent to $ 123.33 in early New York trading.

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