As McDonald's Growth Continues... Customers and Shareholders Alike Are Saying, "I'm Loving It"

by Tony D'Altorio Market Trends Market Trends

As McDonald's Growth Continues... Customers and Shareholders Alike Are Saying, "I'm Loving It"

by Tony D'Altorio, Investment U Research

Tuesday, December 21, 2010

McDonald's (NYSE: MCD), the world's largest fast-food restaurant chain, is one of the most remarkable corporate turnaround stories of the past decade.

2002 saw it in deep trouble with a net profit of $893 million, down from 1.6 billion in 2001.

Same-store sales dropped 2.1%. And it only increased top-line revenues by opening new stores... at an annual 1,000 to 2,000 rate.

Still, McDonald's was spending $5 billion on new stores with no incremental growth. By chasing revenues, it lost profits... which reflected in its stock low of $12.38 in 2003.

Fortunately, that year marked the beginning of a major turnaround. McDonald's began renovating its existing restaurants and improving its internal operations.

Focusing on doing a better job with what it had, it opened only a few new stores. And in response, its profits nearly doubled to $1.5 billion.

The next year, McDonald's added a few hundred new stores and hired its current CEO, Jim Skinner. Net profits jumped again to $2.8 billion. Mr. Skinner pushed the company to go back to the basics, decentralizing in many ways. For example, headquarters no longer dictated menu additions; individual locations did.

He also turned the focus to the 5 P's:

  • People,
  • Products,
  • Place,
  • Price,
  • And Promotion.

As one of McDonald's ads states, the company began to "keep it simple."

Skinner put it this way: "The moment of truth is the 30-second transition between you and the person who takes your order at the drive-through. It's the only place where we make money."

McDonald's in China

Skinner went a step further in targeting overseas growth as a key to McDonald's future profits. Now, of the 1,000 stores it's on track to open this year, about half are in Asia, Africa and the Middle East.

Specifically, many of them are in China, where the company opened its first outlet in 1990. McDonald's now operates 1,100 stores there, its fastest-growing market for openings.

In fact, the fast-food chain opened its first 1,000 restaurants in China faster than it did any other foreign country. It upped its investment there by 25% in 2010 with a company record of 165 new restaurants.

(Interestingly enough, McDonalds funded all that by selling yuan-denominated bonds in Hong Kong earlier this year. In so doing, it became the first foreign non-financial company to do so.)

McDonald's plans to open another 175-200 new restaurants in 2011, a 40% investment increase.

That rapid expansion is part of its plan to have 2,000 retail outlets in China by 2013. The company's goal is to catch up to Yum Brands (NYSE: YUM), whose KFC and Pizza Hut are among the top restaurant chains in the country.

Research firm Euromonitor International reports that total fast-food chain sales in China rose 12% in 2009 to $9 billion. Yum claims the most with 40% of the market, while McDonald's trails at 16%.

To combat that, McDonald's is redesigning its Chinese outlets. It unveiled its LIM restaurant design, which stands for "Less Is More" and fits very well with the company's new corporate identity.

Created by French designer Philippe Avanzi, it features bright colors and soft seats. About 100 McDonald's should feature it before 2012, and by 2013, 80% of the restaurants there should.

The company's China CEO, Kenneth Chan, says the design aims to "offer simple, easy enjoyment for the young generation."

McDonald's Growth Continues

Skinner's strategy definitely seems to be working so far. McDonald's has not only survived the global financial crisis - which cut deep into rivals' profits - but also emerged stronger than before.

Profits rose to $4.3 billion in 2008 and $4.6 billion in 2009. The company's same-store U.S. sales continued growing even amidst near-10% unemployment.

That's because the company had the means and the mindsets to cope with the situation appropriately with its dollar menu. Skinner put it perfectly when he said: "Everyday affordability has become the most important thing. People are pinched everywhere. They should not have to feel pinched at McDonald's."

With that strategy, McDonald's stock rose 23% this year, outpacing the S&P 500. And it even boasted a 3.2% dividend yield to boot!

Clearly, Jim Skinner has both customers and shareholders alike saying, "I'm loving it."

Good investing,

Tony D'Altorio

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