Frappes, smoothies hit sweet spot for McDonald’s, fueling 4.6 rise in August sales measurement

By Emily Fredrix, AP
Thursday, September 9, 2010

Cold drinks, hot summer fuel McDonald’s sales rise

NEW YORK — August’s summer heat provided a lift for fast-food giant McDonald’s, pushing a key revenue figure up 4.6 percent in the U.S. during the month as customers came in for frappes and fruit smoothies.

But the results weren’t as strong as analysts were expecting, largely on weakness in Europe, and shares fell Thursday.

The world’s largest hamburger chain said that August sales at restaurants open at least 13 months climbed 4.9 percent. While the performance was strong and beat growth of 2.2 percent from in August 2009, it is down from July’s 5.7 percent rise — the biggest monthly increase since a 6.1 percent gain in April 2009.

The measurement is for restaurant operators because it measures growth at existing locations. It excludes growth at stores that open or close during the year.

McDonald’s Corp. said the figure climbed 2.2 percent in Europe on strong results in the U.K. and Russia. Limited items, such as the U.K.’s summer barbecue food event, drove sales.

In the rest of the world, those sales were up 7.8 percent — marking a reverse from a drop of 0.5 percent in the same period last year. Among the strongest performers were Japan, China and Australia. The hamburger chain said menu items that appealed to local tastes and convenience helped push sales higher.

Shares fell $2.18, or 2.9 percent, to $73.90 in afternoon trading Thursday on heavy volume.

Performance in the U.S. and Asia, the Middle East and elsewhere beside Europe was strong, said Janney Capital Markets analyst Mark Kalinowski, but “Europe was the culprit.”

He had expected revenue at locations open at least a year to rise 5.5 percent there. He told clients in a note Thursday Europe’s weak results could be because of France, which lowered its value-added tax on restaurant meals from 19.6 percent to 5.5 percent. That spurred a sales gain in August 2009, which created a tougher comparison, he said.

“This move likely helped to boost McDonald’s sales the last several months, but not that we’ve rolled over the benefits from this modification, all else equal France won’t be producing as robust top-line results now that the benefit is gone,” he said.

Revenue in rose 4.7 percent overall, though the company did not say how much revenue was.

McDonald’s, based in Oak Brook, Ill., says customers continue to be drawn to its low cost and core menu items. Its focus on value through its $1 menu has helped the company outpace competitors, including Burger King Corp. and Wendy’s/Arby’s Group Inc. in the weak economy. Shoppers are limiting their meals out in restaurants and increasingly focusing on price when they do venture out.

New menu items, including the highly profitable smoothies the company launched nationwide in mid-July, are also spurring sales. The drinks cost a little over $2 for a small.

The company is outperforming its rivals and the industry by bringing new menu items such as smoothies and frappes to market, said Citigroup analyst Greg Badishkanian.

“Those are the types of products that I think drive consumers into their stores,” he said.

So far this year, through the end of August, revenue at locations open at least a year rose 4.9 percent overall, an improvement from 4.2 percent at the same time last year. The figure rose 3.3 percent in the U.S., slightly below last year’s 3.5 percent. The fast-food industry is still hurting a bit in the U.S. as shoppers continue to grapple with weak job and housing markets.

Europe’s performance also slowed, with the figure rising 4.8 percent there, down from 5.2 percent last year. That market too is hurting because of the economy. But the rest of the world’s growth soared, rising 6.2 percent, from 3.8 percent last year. Consumer-oriented companies are increasingly focusing their growth in less developed markets including China as those economies grow.

The company said it tentatively plans to release its third-quarter results on Oct. 21.

AP Retail Writer Michelle Chapman contributed to this report.

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