Flat Sales for McDonald’s; Another Food Crisis in PRC

Global comparable sales were relatively flat for McDonald's Corporation during the second quarter that ended on June 30, 2014, the Oak Brook, Illinois, USA-headquartered company announced on July 22. While consolidated revenues for the world’s largest QSR operator 935,000-plus units in over 100 countries) edged up 1% to $7.18 billion thanks to unit expansion, net income slipped by 1%.

The results fell short of expectations of Wall Street analysts, who figured on a 0.8% rise in system-wide sales and a 0.3% fall in US receipts, according to Consensus Metrix. Owners of McDonald’s stock received diluted earnings of $1.40 per share, an increase of 1% (1% in constant currencies), benefiting from a decrease in diluted weighted average shares outstanding.

In the United States, second quarter sales decreased 1.5% compared to the same period in 2013, while operating income rose 1%. Results for the quarter reflected a negative comparable guest traffic count amid ongoing broad-based challenges.

“To reignite momentum over the next 18 months, we're focused on fortifying the foundational elements of our business by concentrating our efforts on compelling value, marketing and operations excellence to become a more relevant and trusted brand," said Don Thompson, McDonald's president and chief executive officer.

In Europe, comparable sales declined 1.0% and operating income was flat (decrease of 4% in constant currencies) in the second quarter. The UK and France delivered solid comparable sales and operating income results for the quarter. Results in Germany reflected ongoing weakness. Emphasis on compelling premium menu offers, a renewed focus on core menu and value options, and the roll-out of blended ice beverages in several markets supported the quarterly performance.

APMEA's (Asia/Pacific, Middle East and Africa) second quarter comparable sales increased 1.1%, reflecting a strong comparable sales performance in China, as well as positive performances in other markets. Results were impacted by continued weakness in Japan. APMEA's second quarter operating income declined 2% (increase of 1% in constant currencies). Enhanced value offerings, locally relevant product promotions, convenience initiatives and new store development were positive contributors to the segment's results.

The results were posted a day after another food safety crisis broke out in China that could hurt sales for McDonald’s and rival Yum Brands Inc. (parent company of KFC and Pizza Hut), following television clips showing factory workers picking up meat from a floor with bare hands for further processing, as well as mixing raw chicken and beef that had exceeded its “use by” expiration date with fresh meat. The packer, Shanghai Husi Food Co. Ltd., was a supplier to McDonald’s as well as Yum Brands. Both QSR operators quickly announced that they would immediately suspend purchases in the PRC from the OSI Group supplier.

According to an article in the Shanghai Daily, a state-sponsored newspaper, “the use of out-of-date meat” at the company “had been going on for years.” The Shanghai Food and Drug Administration has ordered Husi customers to cease product purchases, and seal inventory for inspection.

In a previous food safety scandal, KFC sales in China were adversely impacted last year following reports in late 2012 regarding the use of unapproved antibiotics among some chicken farmers that supplied the chain.