McDonald's gets shot in at Taco Bell during weak earnings report

McDonald’s Corp. reported fairly weak first-quarter sales but still had enough strength to fire a shot across the bow of Taco Bell, which has received so much attention for its new breakfast menu.

Customers choose McDonald’s for breakfast because it is freshly prepared, said McDonald’s Corp. CEO Don Thompson during today’s Q1 earnings call. “We cook in our restaurants. We crack fresh eggs. We have ovens and grills,” he added. Breakfast competition has been intense for years and McDonald’s remains the daypart’s QSR leader, he said.

McDonald’s made clear it will defend its breakfast sales against “taco shop” competitors.

There’s always some new competitor, including “taco shops,” making a run at McDonald’s breakfast sales, he said, and consumers can be expected to try what’s new. But McDonald’s “has not seen any [sales] impact relative to new competitors,” he said.

McDonald’s has “defensible competitive advantages” that it needs to communicate in it marketing, he said.

Thompson said McDonald’s is focusing its attention on four “priority markets”—the U.S., Germany, China and Australia—that have seen sales declines. In Q1, U.S. comp sales were down 1.7% due to lower guest traffic. Thompson said 1.4% of that was attributable to severe winter weather. “The Informal Eating Out Market in the U.S. is relatively flat. It’s a market-share battle,” said Thompson. “So we’re focused on what the customer focuses on,” which he said includes breakfast, balancing new and core menu items and efficient store operations.

Thompson said the company occasionally focuses too much on profit margins and not enough on customers. “We’ll always have profitability in our plans but it has to be customers first,” he said.

In the U.S.—where Q1 menu prices were 3% higher than a year earlier—McDonald’s is strengthening its marketing message by focusing more narrowly on food quality and affordability while making a “greater emotional connection” with consumers, he said.

To improve store efficiency and service times, U.S. stores are undergoing what he called a “reset.” This is a focus on staffing, scheduling and positioning to make sure crews are ready, especially during peak hours. The new High Density Kitchen prep tables the chain has talked about for the last year will be in all U.S. units by mid-year. These should help speed preparation and allow for future addition of new toppings for sandwiches.

But Thompson repeated that McDonald’s will not return to introducing too many LTOs that slow service. This has been a problem in Germany but a new strategy calls for a focus on core products as in the U.S.

It’s noteworthy that one of the LTOs that did not do well enough to lift Q1 sales was the February return of Mighty Wings at a lower price. The Bacon Clubhouse burger arrived on March 10.

Thompson said McDonald’s suspended operations in three stores in Crimea because of a suspension of financial and banking services. Operations in Russia continue to be among the chain’s most profitable although a 14% decline in the ruble led to higher commodity costs that depressed earnings there.