McDonald's Defies Economic Gloom

You won’t find Lynn Landgraff featured in the pages of the Wall Street Journal or BusinessWeek. However, she’s a good example of how some people are sidestepping the current economic turmoil. Lynn owns and operates a McDonald’s (MCD) in the small town of Greer, South Carolina. According to the Greenville News,

[Lynn] hired 65 people to work at her new store, and may be looking to hire about 10 more as business picks up during the holidays.

McDonald’s is an extremely resilient business. It has already survived the Italian based “slow food movement” and the Oscar-nominated documentary Super Size Me which showed the filmmaker gaining 30 pounds and developing toxic shock after eating nothing but McDonald’s food for a month.

It’s going to take a guided missile to cripple McDonald’s. With 32,000 restaurants in 118 countries – and an entirely discretionary product –, many observers predicted that missile would be a sharp global economic downturn.

However, the latest earnings, released on Wednesday, have added to the legend of McDonald’s as bulletproof company that can thrive in any market. McDonald’s Q3 global sales growth boosted overall revenue by 6% to same-store sales rose 7.1 percent globally and 4.7 percent in the U.S.

In a conference call, Chief Executive Jim Skinner boasted:

McDonald’s is 'recession-resistant.' We are operating from a position of strength.

Although the rising price of meat has forced McDonald's to raise its prices an average of 4% in the last 12 months, its margins are still healthy because of its size. It has also diversified its menu away from burgers and fries to non-meat items like coffee, salad ice-cream, desserts and now cappuccinos.

After the Q3 Earnings Report, Standard & Poor's changed its McDonald’s rating from “Hold,” to “Buy” noting that McDonald’s was taking market share away from full-service restaurants.

In the current gloomy economic climate, it makes sense that consumers want cheap meals without the expectation of leaving a tip, but it doesn’t explain McDonald’s dominance over other low cost fast food chains, like Burger King (BKC).

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To understand the success and the resilience of McDonald’s you simply have to go there, and observe the profile of the customers. I ate lunch at McDonald’s on Thursday (Angus Burger with Bacon & Cheese, Iced Coffee, and a Strawberry Sundae: $9.58). In front of me, there were two young mothers with toddlers. To the left was an older gentleman with a tattered jacket nursing a coffee. To the right there was a line-up of young men and women in business suits, ordering burgers and salads and disappearing out the front door.

McDonald’s has successfully positioned its brand to appeal to three different socio-economic groups, without confusing its message. They are a destination for families with children, people who are short of money, people who are short of time. And those are three solid groups. There are always people with children. There are always people who are short of money. Moreover, there are always people in a hurry.

However, that’s not all that McDonald’s is doing well. For a $60 billion corporation the company is remarkably nimble in the way that it morphs to appeal to the specific cultural nuances of different markets. For instance, last week I spotted several “McInternets” in South America. In Bangkok, Thailand, they have “McCafes” which compete directly with Starbucks (SBUX).

Buenos Aires, Argentina is home to 310,000 Jewish people. A few years ago, McDonald’s opened a kosher restaurant there, the first one to exist outside of Israel. Astonishingly McDonald’s is equally popular with consumers aged 12 to 64. I cannot offhand think of another product or service with that type of demographic and age reach.

McDonald’s is not – in the near future - going to be a five bagger. It probably never will. In markets like these, where stock picking is like waltzing through a minefield, you could do a lot worse than investing in a deeply branded multi-national company with surging profit.

At Q1 Publishing, we believe a market rebound will come. In fact, we continue to recommend slowly wading into the market, but be prepared for darker days ahead. McDonald’s does prove that the world is not coming to an end. Even in these tough times, there are companies with a proven ability to survive and profit from economic downturns.

Disclosure: None

Comments

[mwswi:]

"McDonald's, I'm lovin' it," (their stock, generous dividend, evolving menu strategies, and global presence).

The "Secret Sauce": A main ingredient has to be management/stewardship that is actually in tune with their marketplace, knows a thing or two about strengthening their brand, and strive to constantly enhance their customers' experiences. McDonald's intends to continue returning $17 billion to shareholders, via dividends and stock repurchases, which began in 2007 and will continue through 2009.

Their "Value Menu": The U.S., Europe, and Asia Pacific, Middle East, and Africa, account for about 47%, 40%, and 13% of the firm's operating income, respectively. McDonald's also has a presence in Canada and Latin America. McDonald's also has a presence in Canada and Latin America. In-roads into China and other emerging markets will continue to grow.

The "Drive Thru": Lots of folks that we've watched, over the years, frequent nearby establishments such as Applebee's, The Ground Round, and other like eateries are now seen stopping by (or driving thru) the Golden Arches instead. Should this econonomic climate persist, I think we'll see more diners/families frequent McDonald's.

Is McDonald's a safe long-term bet? In my humble opinion, "Yes, it's about as safer or safer than anything out there." However, like all stocks, only time will tell. Meanwhile, "I'm loving" the fact that MCD maintains a prominent position within my family's portfolio.

2008 Oct 24 10:22 AM

[Market Folly:]

I really think there will be a "trading down" effect even more than anyone realizes. In a weak economy, they offer cheap and fast food. people's wallets are what matters here and if you're going to play the consumer, playing mcd makes perfect sense. i don't think a slowdown/recessions on a global basis would hurt sales, i actually think they will help as people struggle to get by and mcd is the cheap alternative. i had written more about my thoughts on mcd here: www.marketfolly.com/20...

2008 Oct 24 10:54 AM

[mwswi:]

marketfolly,

I read your article at www.marketfolly.com (thanks for providing the link). I think your analysis is both accurate and timely. One other aspect that isn't mentioned anywhere, and may be flirting with politically incorrectness (but who cares), is that many younger-to-middle-aged women either: (1) do not know how to cook, or (2) proudly refuse to. This also represents another segment of society that is accustomed to frequently dining out. Again, as money becomes tighter due to escalating bills, paychecks that don't keep pace with inflation/cost of living, etc., more and more are opting for that quick, economically feasible meal at their neighborhood Golden Arches.

I personally think it's just another "real" factor that plays into McDonald's favor.

2008 Oct 24 06:20 PM