McDonald's looking to heat up US sales with breakfast, coffee


Raymond Tremblay, a loyal McDonald's customer from Los Angeles, thinks the fast-food chain sells tasty food at reasonable prices and he cannot think of a quick fix that would help end the company's disappointing U.S. performance.

"I know it's there and it's always good," Tremblay, 46, said of McDonald's. "Maybe we just kind of take it for granted."

Such customer feedback underscores the challenges faced by the world's biggest restaurant company, which has reported 19 months of turbulent sales at established U.S. restaurants amid sluggish economic growth, stepped-up competition and internal missteps that have complicated its menus and slowed service.

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In a recent call with analysts, McDonald's Chief Executive Officer Don Thompson vowed to "create more of a coffee culture through high-quality McCafe products" as well as to double-down on breakfast and sales of food priced around $1—in a bid to bolster sales.

A customer holds a McCafe cup inside a McDonald's Corp. restaurant in Oak Brook, Illinois.
Tim Boyle | Bloomberg | Getty Images

Once or twice a week, Tremblay makes a slight detour from his morning commute to pick up coffee and a sausage McMuffin with egg or a sausage burrito.

He has bought the company's flavored coffees, but never orders the espresso drinks made from pricey McCafe machines that McDonald's franchisees installed to compete with Starbucks.

Tremblay, a production artist for an animation firm, is happy when his favorite items are on sale - but he and other customers say that discounts are not enough to change their morning routines.

Mel Yu, a 32-year-old automotive industry consultant from Grand Blanc, Michigan, still goes to McDonald's three to four times a week - but that is down significantly from a decade ago, when McDonald's was just about the only place to grab a quick morning meal.

These days, breakfast competition is fierce. Starbucks is introducing new pastries, fast-food chains Burger King and Dunkin' Donuts have come on strong with food and drinks, and bakery chain Panera Bread has rapidly expanded.

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McDonald's owners in Yu's area have been couponing and matching discounts from competitors. Still, Yu said that has not increased the frequency of his visits to the Golden Arches: "I'm going there anyhow."

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McDonald's did not immediately respond to requests for comment via telephone or email.

Domestic restaurant sales fall

McDonald's on Monday said U.S. sales at restaurants open at least 13 months fell 3.3 percent in January—more than twice as steep as the drop that analysts polled by Consensus Metrix expected.

McDonald's blamed the frigid cold and snow that hit large parts of the United States, but analysts said McDonald's domestic patrons continue to be pinched by the slow economy.

It is a trend playing out across the industry.

(Read more: Europe, China lift McDonald's January comparable sales)

McDonald's and other restaurants that cater to the financially strapped low-to-middle income masses—including Darden Restaurants Olive Garden and Red Lobster chains—are struggling to bring in sales.

At the same time, Starbucks, Panera, Chipotle Mexican Grill, and Darden's Capital Grille steak house, which cater to somewhat wealthier diners, are outperforming.

King of breakfast

McDonald's was the undisputed leader in the U.S. quick-service breakfast category with 19 percent market share in 2013, according to Nielsen consumer data firm Scarborough.

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Its closest rivals last year were Starbucks and Dunkin' Donuts, each with 7 percent market share.

"When you're No. 1, you've got one direction to go and that's down. Everybody's got a target on your back," Investment Technology Group restaurant analyst Steve West said.

Some analysts expect investors to give Thompson, McDonald's CEO who took the helm in July 2012, most of this year to turn the ship.

Thompson championed the McCafe push during his tenure as president of McDonald's USA from 2006 to 2010. That program required franchisees to renovate restaurants to create space for equipment, such as an espresso machine that cost between $10,000 and $15,000 per restaurant.

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The McCafe expansion—which also included blended fruit smoothies and other drinks—is widely viewed as a success.

While regular coffee sales are reported to be brisk, some franchisees have complained in surveys that sales of espresso drinks fall far short of covering the cost of the high-maintenance machines that crank out lattes and mochas with the press of a button.

Howard Penney, restaurant analyst at Hedgeye Risk Management, said McCafe is at the heart of McDonald's operational woes.

Contrary to conventional wisdom, Penney says the McCafe business has been slowing down service and that the recent roll-outs of too many new food products and limited-time offers have only exaggerated the problem.

For now, McDonald's is focusing on making its food preparation more efficient. It has called on restaurant operators to install a $25,000 to $50,000 "high density table" that stores sandwich toppings and other items. Executives say that new equipment will help workers turn out sandwiches and other food faster.

If that investment does not boost sales at established restaurants in the second half of 2014, Penney said McDonald's would be forced to look at McCafe.

"McCafe is a sacred cow right now," Penney said.

By Reuters