Forget China: This is the Real Reason McDonald's Should Be Worried
October could turn into a horror show for McDonald's , and we're not just talking about Halloween or the tainted food scandal by its Chinese food supplier that's still haunting it.
No, the burger chain could be losing market share here at home in the breakfast daypart it has dominated for so long, and that could send chills of terror down investors' spines.
Customers fled McDonald's Japan division after the tainted meat scandal broke in July. Photo: Flickr user Achim Hepp.
Earlier this week, McDonald's Holding, the Japanese division in which the U.S. burger chain owns a 49.9% stake, said it expected to post for 2014 a net loss of 17 billion yen, or $156.7 million, the first time in 11 years that it hasn't turned a profit. While that in and of itself is bad, the magnitude of the loss is what's scary. Last year the division had generated a profit of 5.17 billion yen, and until the supplier scandal broke in July it had been forecasting a profit of as much as 6 billion yen.
Of course McDonald's pulled its guidance immediately after it was revealed former supplier Shanghai Husi was using meat well past its expiration date, and the restaurant warned things could get ugly, but this is still a significant turn of fortunes and as McDonald's Holdings CEO Sarah Casanova declared, "Customers have expressed a lack of confidence in our food quality."
But piling on that bad news is an ominous warning for McDonald's back here at home.
Yum! Brands reported earnings on October 7, 2014 that also exhibited the same terrifying flight of customers from its China division as both KFC and Pizza Hut reported dramatically lower same restaurant sales. However, an otherwise seemingly little noticed detail in its earnings conference call with analysts portends even more bad tidings coming McDonald's way.
Yum!'s Taco Bell unit reported a rather lackluster 3% increase in domestic comps during a time in which it was engaged in some high-profile promotional activity, which ought to have produced better (and larger) numbers. But more telling was that driving those comps higher was actually a 6% jump in sales of its new breakfast menu offerings (and a little bit of pricing action too).
That means Yum! looks like it stumbled badly in the lunch and dinner dayparts, but performed quite well in breakfast -- the morning meal that McDonald's has simply owned. If Taco Bell is scoring big points with its Breakfast Burrito, then the burger flipper is likely to have lost a lot of ground with its own menu.
There has been a lot of attention being paid to breakfast these days, and restaurants not traditionally associated with the daypart have suddenly taken an interest. White Castle, anyone?
The researchers at Technomic estimate McDonald's has a 31% market share of the daypart, which generates 20% of its $28.1 billion in annual worldwide revenue. Arguably a lot of that is due to its McCafe coffee, which McDonald's had to start giving away for free just to keep patrons coming in the door.
It resorted to the giveaway program in April, soon after its rivals began offering breakfast, a move that allowed it to record flat comps for the month, the first time since last October they weren't negative. But as sales immediately resumed their freefall, it turned once again to the freebies in September in hopes of stemming the customer exodus. If Taco Bell's results are any indication, going to the free coffee give-away again will prove to be a failure.
McDonald's reports its earnings on Oct. 21. Considering how its business is going in the Asia-Pacific region, and the inroads being made by rivals here at home, Halloween could end up being a very scary time indeed for McDonald's investors.
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The article Forget China: This is the Real Reason McDonald's Should Be Worried originally appeared on Fool.com.FollowRich Duprey's coverage of all the restaurant industry's most important news and developments. He has no position in any stocks mentioned. The Motley Fool recommends McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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