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October 21, 2014

McDonalds Sales Disappoints on Dollar Menu Sticker Shock

By Tyler Durden at ZeroHedge 

Moments ago, McDonalds not only released earnings and revenues, both of which missed - something which was largely expected since the backward looking data had been telegraphed by MCD's recent global selling collapse - blanketed by atrocious commentary, but it disclosed its September global retail sales which were for lack of a better word, a disaster, after reporting global sales which dropped 3.8%, below the 3.2% expected, and the worst global month since at least 2003. The pain was everywhere, with Europe plunging 4.2% (est -0.9%), Asia down 7.5%, and the US down a whopping 4.1%, far below the 2.8% expected, and also the worst month in over a decade.

In fact, McDonalds sales in the US have have now gone a whopping 11 months without posting a positive sales month, the longest stretch on record!

But while collapsing MCD sales are a combination of both the insolvent US consumer, who can no longer afford to buy either MCD or Coke (as we commented earlier) especially after purchasing the latest and greatest iThing on credit, as well as shifting tastes and eating the "cool food du jour", things are only going to get worse from here.

Because in a world that is allegedly flooded with deflation, the one place where everyone considered safe for "dollar meals", just got more expensive. Bloomberg reports:
Mike Hiner used to take his grandsons to McDonald’s (MCD) when they wanted a treat. With higher wage and food costs pushing up prices at the Golden Arches, he’s increasingly taking them to IHOP, Denny’s and Chili’s instead.

The loss of bargain-seeking customers like Hiner underscores a growing challenge for McDonald’s Corp.: While the company still offers several items for $1, its menu is quietly getting more expensive. McDonald’s said its prices were up about 3 percent through the end of June compared with 12 months earlier. That’s more than the 2.5 percent gain in prices for food Americans purchased away from their homes in the year through August, according to the Bureau of Labor Statistics.

The chain’s diminishing appeal among budget diners -- coupled with rising meat costs -- are projected to take a bite out of third-quarter earnings due to be reported tomorrow. Analysts estimate that McDonald’s revenue fell 1.8 percent to $7.2 billion in the period. Net income, which also were hurt by a food-safety scare in China, slid 11 percent to $1.36 billion, according to the projections.
And sure enough, see the charts above. But that is only the beginning:
Some Americans are extremely price sensitive, and any increases may send them elsewhere, said John Gordon, principal at San Diego-based Pacific Management Consulting Group, an adviser to restaurants and franchisees.

If you encourage and kind of seed the notion that you can come in for a couple bucks and get some food -- and then you can’t do that anymore -- there’s bound to be a reaction,” he said.
There is also bound to be a reaction when the already broke US consumer maxes out their credit card on a telephone and forgets to eat.
The result has been that fast-food chains, long thought of as the cheapest place to grab a quick bite, may now have that reputation working against them, said Joel Cohen, president of Cohen Restaurant Marketing Group in Raleigh, North Carolina. The higher prices may be driving some customers to seek alternatives either at fast-casual chains like Panera Bread Co. (PNRA) or even at sit-down places, he said.

“It’s sticker shock,” Cohen said. “You’re up at price where you could just about be dining at a casual-dining restaurant.”
And when you hear the phrase "sticker shock" in the same sentence as a McDonalds dollar meal, you know the end is in sight.

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

Courtesy Tyler Durden, founder of ZeorHedge (EconMatters author archive here

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