Key Points:
- Q2 sales results in the US were below expectations as difficult comparisons, less-than-excellent marketing, too many stacked promotions / menu changes, and a volatile macro weighed on traffic / transactions.
- Given the underperformance, Skye Anderson was promoted as the new President of its U.S. business, succeeding Joe Erlinger, who is “retiring.”
- Observed traffic (per Advan) did not match comp-transactions. We think there is a signal there that suggests longer waiting lines and discouraged visitors hit transactions.
McDonald’s US comps (+0.8%) were less than Q1’s (+3.9%) and our preview. Sometimes an estimate is wrong because of the method (and the data), other times it’s wrong because the conditions / execution changed. Per method, nothing has changed in Advan’s traffic data / panel QoQ. Moreover, last week we looked at the results from Yum, Chipotle, and Cheesecake Factory, where we shared that our data nicely matched results; we can think of no reason that McDonald’s would be unique. For McDonald’s, we do observe a sharp step down in transactions for each month of the quarter. The disparity between traffic and transactions for each month is quite large and outside of any monthly period of the past three years (aside from one). And so, what’s causing the mismatch, i.e. the conversion rate to fall? Per conditions, Q2 gas prices and weather were quite dynamic, which may have led to atypical consumer behavior. Per execution, McDonald’s announced with results that it was changing leadership of the US business with Skye Anderson taking over from Joe Elringer (6 years in the role). And so, execution was a large contributor to the softer sales and potentially the unusually large disparity.
We also think that Elringer and McDonald’s misjudged how hard last year’s comp was from last year’s Minecraft promotion (+250bps to traffic), given the characterization of this quarter’s underperformance and the fact that US comps on a 2-yr basis accelerated by +110bps. Additionally, last year’s Minecraft offer also aligned with this year’s spike in gas prices, convoluting factors, and a large step down in traffic during April. While the new MacValue program at the end of April boosted traffic, the lift was “less than planned.” May benefited from the Refreshor launch, which management described as a success. June benefited from the FIFA campaign, but again the campaign delivered less lift than “planned.” The observed check of +3.3% was similar to last quarter’s increase; that, plus the characterized misses, implies that traffic and transactions were the shortfalls to plan.
CEO Chris Kempczinski: We don't have a strategy problem. We simply didn't execute at the level we needed to in the second quarter. Our execution opportunities fall into three buckets. First, although we've restored our overall value and affordability leadership, our restaurant-level results show that execution was inconsistent across the system. The strongest performing restaurants consistently executed our new everyday, affordable-priced menu and delivered strong restaurant operations. We need that same level of execution in all our restaurants. Second, our restaurant teams were overwhelmed by too many deployment in the quarter, which led to less efficient restaurant operations. This impacted customer service times, and as service times went up, satisfaction scores went down. And third, our marketing programs didn't deliver against expectations.”
CFO Ian Bordan:We had a slow start to the quarter with comparable sales slightly negative in April as we lap last year's highly successful Minecraft campaign. In late April, we augmented our MacValue program with a new <$3 everyday affordable price, or EDAP menu... Inconsistent restaurant-level execution of the EDAP menu and consumer awareness levels below target resulted in lower incrementality than we expected. At the same time, the business pulled back on digital offers and removed our Buy 1-&-1 for a dollar feature to offset the investment behind Mic-Value. In combination, all of these factors negatively impacted visits from some of our most loyal customers. We estimate that these value execution factors accounted for about 2/3 of the customer traffic underperformance relative to our expectations for the quarter. The remainder of our underperformance can largely be attributed to our FIFA campaign in June. While the campaign provided a lift to the business and generated excellent system excitement, the campaign underperformed versus our expectations... As Chris noted, operations metrics worsened in the quarter as restaurant teams were overwhelmed with too many complicated deployments. We've already taken steps to simplify restaurant operations by eliminating several non-customer-facing activities over the remainder of the year so that our restaurant teams can focus on delivering a great experience for our customers. In short, we're acting with urgency to improve our baseline guest traffic and put the U.S. business in a stronger position as we exit 2026.”
I think, as you heard us talk about on the execution opportunities that we've talked a fair bit about already, those certainly extended into the start of Q3 and in the U.S. were slightly negative in July. I think as we talked about a lot already, obviously, the team is acting with the right sense of urgency. The system is acting with the right sense of urgency, and we're beginning to take action to kind of get some of those execution issues addressed.”
Affirming Bordan’s characterizations, observed frequency declined a substantial -5.7% in the quarter. Observed dwell-time increased +1.7% (and +2.6% in June), sizing the slower throughput in the quarter due to poor execution. (These figures were largely stable in Q1). Using the past eight quarters as a proxy and tracking over that period, the quarter’s observed traffic implies that comp-transactions should have been +1.2% vs. the observed shortfall of -3.0%, sizing the mis-execution and worse conversion at -420bps. This leads us to conclude that there is still something less well explained by management, and that is, did the quarter’s issues lead to more “cart abandonment” at the stores as visitors saw long lines and turned around, or once in the store did visitors witness a dissonance that discouraged them from ordering. That’s something to ask about at the September Investor Day.
