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McDonald’s Global Makeover Supersizes Profits

by: Money Morning posted on: July 23, 2008 | about stocks: MCD

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By Jason Simpkins

McDonald’s Corp. (MCD) fried analysts’ estimates Wednesday, swinging to a better-than-expected second quarter profit largely bolstered by strong overseas sales.

McDonald’s reported profit of $1.19 billion, or $1.04 a share, compared with a loss of $711 million, or 60 cents a share, for the same period a year ago. Revenue rose 4% to $6.08 billion, with same store sales up 6.1% worldwide. (See conference call transcript.)

“We’re operating from a position of strength with double-digit operating income growth in Europe and Asia/Pacific, Middle East and Africa and solid quarterly results in the U.S.,” said McDonald’s Chief Executive Officer James Skinner.

Asia/Pacific, Middle East and Africa delivered strong results, with second quarter comparable sales up 8.8% and operating income up 37%.

In Europe, comparable sales increased 7.4% and operating income rose 29% as McDonald’s forged a new image for itself with regional menus and prices, and a McMakeover that replaced the restaurant’s quick-serve 1970s nuances with a more congenial atmosphere and modern flare.

“Emphasis on delivering an improved customer experience along with unique marketing and signature menu options drove performance,” the company said on its website. “Europe’s three-tier menu offerings, innovative new products and restaurant reimaging continue to give customers even more reasons to visit McDonald’s.”

The “reimaging” campaign was spearheaded by Denis Hennequin, president of McDonald’s European operations. The company’s signature red and yellow signs and plastic and vinyl interiors were replaced with more art deco scaffolding, leather couches, wood tables, and wall paintings. It also offers Internet access and rental iPods to many of its contemporary European customers.

McDonald’s has spent more than $800 million remodeling 1,280 restaurants across Europe over the past year.

"The brand position is different in different parts of the world," Hennequin told BusinessWeek. "In Europe it’s more about the experience.”

In the United States, about 70% of sales come from drive-throughs.

The company hasn’t stopped with the aesthetic, either, as McDonald’s has also tailored its menu to regional tastes. The restaurant first started serving beer in Germany in the 1980s and then in Canada. Customers can order pasta freshly cooked to order in Rome, porridge in the United Kingdom, and a deep-fried patty of beef ragout in the Netherlands.

Perhaps that is why Europe has become McDonald’s highest yielding region, despite having just one-quarter the number of stores in the United States. Last year revenue from company stores and royalties from franchises totaled $8.8 billion in Europe, versus $7.9 billion in the United States.

“McDonald’s is much more sophisticated today,” Hennequin says. “It’s one brand with many facets.”

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