10/25/2014 McDonald's Vows Fresh Thinking - WSJ - WSJ This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers visit http://www.djreprints.com. http://online.wsj.com/articles/mcdonalds-profit-falls-30-on-u-s-china-woes-1413893397 EARNINGS After Steep Drop in Profit, Burger Chain Eyes the Customized-Food Bandwagon McDonald's reported its global same-store sales fell 3.3% in the latest quarter. JOHN TAGGART FOR THE WALL STREET By JULIE JARGON Updated Oct. 21, 2014 8:48 p.m. ET McDonald's Corp. outlined plans for what it called fundamental changes to its business as it reported one of its worst quarterly profit declines in years, driven by problems in nearly every major part of its business. The 30% decline in net income for the period ended Sept. 30 was the latest in a string of disappointing results for the world's largest restaurant chain. It is struggling with weak sales in Asia, Europe and, most important, its home market in the U.S. In the U.S., an increasingly complicated menu has slowed service and McDonald's once reliable base of younger customers have defected to fast-casual chains boasting customized ordering and fresh ingredients, including Chipotle Mexican Grill Inc., and specialty-burger places such as Five Guys. McDonald's has focused so far on efforts including increased staffing at busy times, and has shaken up its management ranks, including replacing the head of its U.S. business for the second time in less than two years. But the changes have yet to boost sales or profit. http://online.wsj.com/articles/mcdonalds-profit-falls-30-on-u-s-china-woes-1413893397?mod=djem_jiewr_MG_domainid 1/4 10/25/2014 McDonald's Vows Fresh Thinking - WSJ - WSJ The 4.1% decline in McDonald's September U.S. same-store sales marked the worst monthly U.S. same-store sales performance since February 2003. In response, McDonald's Chief Executive Don Thompson on Tuesday said it would simplify its menu starting in January, in part to remove low-selling products, and plans to give the company's 21 domestic regions more autonomy in rolling out products that are locally relevant. By the third quarter of next year, McDonald's also plans to fully roll out new technology in some markets to make it easier for customers to order and pay digitally and to give people the ability to customize their orders, part of what the company terms the \"McDonald's Experience of the Future\" initiative. \"The key to our success will be our ability to deliver a more relevant McDonald's experience for all of our customers,\" Mr. Thompson said. \"Customers want to personalize their meals with locally relevant ingredients. They also want to enjoy eating in a contemporary, inviting atmosphere. And they want choices in how they order, choices in what they order and how they're served.\" READ MORE McDonald's China Challenge: Competition 'New Normal' Haunts Coke McDonald's Faces 'Millennial' Challenge (Aug. 24) McDonald's Meat Supplier Pulls Chinese Plant's Products (July 27) Russia Shuts 12 McDonald's Restaurants as Tensions Rise (Aug. 29) McDonald's thrived through the global economic downturn. In the decade from 2001 to 2011, sales nearly doubled and profit more than tripled. But Mr. Thompson, who helped drive that growth as head of McDonald's U.S. business, has confronted a series of challenges since taking the top job in July 2012. In China, a scandal at one of its meat suppliers has shaken customer confidence, driving same-store sales down 9.9% in the latest quarter in McDonald's Asia/Pacific, Middle East and Africa region. In Europe, broader economic softness was compounded by political complications in Russia, where authorities have been inspecting and, in some cases, shutting McDonald's restaurantsmoves widely seen as retaliation for U.S. sanctions in response to Russia's military incursion in Ukraine. http://online.wsj.com/articles/mcdonalds-profit-falls-30-on-u-s-china-woes-1413893397?mod=djem_jiewr_MG_domainid 2/4 10/25/2014 McDonald's Vows Fresh Thinking - WSJ - WSJ The problems in China and Europe are considered to be short term. McDonald's said it would be another six to nine months before the China business fully recovers. But the U.S. market, which accounts for roughly 40% of its more than 35,000 global restaurants, is facing a fundamental shift in the way Americans buy food. Young consumers, in particular, have been flocking to fast casual restaurants such Chipotle and Panera Bread Co. Mr. Thompson said he knows consumers want more transparency about the source of ingredients. McDonald's recently launched a social-media campaign in which it offers to answer questions about its food, and he said McDonald's is considering offering organic food in some markets. McDonald's shares are down with a decline in global sales and Coca-Cola unveils a broader cost-cutting plan. MarketWatch's Sital Patel has the details. Photo: Getty \"We recognize that we must demonstrate to our customers and the entire McDonald's system that we understand the problems we face and are taking decisive action to fundamentally change the way we approach our business,\" he said. Analysts who participated in McDonald's earnings call on Tuesday remained skeptical about whether the company can address bigger shifts in consumer behavior and win back younger customers without a major overhaul of the menu to include healthier fare. Tony Scherrer, director of research at Smead Capital Management, which owns more than 150,000 McDonald's shares, applauded the efforts. \"To add some components that would give you a sense of local feel and health and for them to brand it as such would speak to the demographic they've missed out on,\" he said. \"For people to expect McDonald's to change their lineup in order to become a Chipotle is unreasonable.\" Edward Jones analyst Jack Russo said that while people want variety, customizing menu items at a chain that derives about 70% of its sales from the drive-through could slow service even more. And becoming more healthful isn't a panacea, he said, especially for a chain that has already tried adding salads, fruit smoothies and oatmeal to its menu with little traction. \"There's a huge portion of the population that could care less about health and wellness,\" Mr. Russo said. \"They need to get lower middle-income consumers back to http://online.wsj.com/articles/mcdonalds-profit-falls-30-on-u-s-china-woes-1413893397?mod=djem_jiewr_MG_domainid 3/4 10/25/2014 McDonald's Vows Fresh Thinking - WSJ - WSJ their stores.\" For the third quarter, profit fell to $1.07 billion, or $1.09 a share, from $1.52 billion, or $1.52 a share, a year earlier. The latest result included tax-related charges of 26 cents a share, flowing largely from what McDonald's said was an unfavorable tax-court ruling in a foreign tax jurisdiction that it didn't name. Revenue fell 5% to $6.99 billion. Analysts polled by Thomson Reuters had expected earnings of $1.37 a share and revenue of $7.18 billion. The drop in quarterly profit was the steepest since 2007, according to Sara Senatore, an analyst at Sanford C. Bernstein. Excluding one-time items like the tax charge, it was McDonald's worst quarterly earnings decline since 2002, she said. Shares closed 0.6% lower at $91.01 on Tuesday, leaving them down more than 6% for the year. Chelsey Dulaney contributed to this article. Write to Julie Jargon at julie.jargon@wsj.com Copyright 2014 Dow Jones & Company, Inc. All Rights Reserved This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com. http://online.wsj.com/articles/mcdonalds-profit-falls-30-on-u-s-china-woes-1413893397?mod=djem_jiewr_MG_domainid 4/4