You won’t find Lynn Landgraff featured in the pages of the Wall Street Journal or BusinessWeek. But she’s a good example of how some people are sidestepping the current economic turmoil.
Lynn owns and owns and operates a McDonald’s (MCD) in small town of Greer, South Carolina. According to the Greenville news, “[Lynn] hired 65 people to work at her new store, and may be looking to hire about 10 more as business picks up during the holidays.”
McDonald’s is an extremely resilient business. It has already survived the Italian based “slow food movement” and the Oscar-nominated documentary Super Size Me which showed the filmmaker gaining 30 pounds and developing toxic shock after eating nothing but McDonald’s food for a month.
It’s going to take a guided missile to cripple McDonald’s. With 32,000 restaurants in 118 countries – and an entirely discretionary product – many observers predicted that missile would be a sharp global economic downturn.
But the latest earnings, released yesterday- have added to the legend of McDonald’s as bullet proof company that can thrive in any market.
McDonald’s Q3 global sales growth boosted overall revenue by 6% to same-store sales rose 7.1 percent globally and 4.7 percent in the U.S.
McDonald’s is “recession-resistant,” boasted Chief Executive Jim Skinner in a conference call, “We are operating from a position of strength.”
Although the rising price of meat has forced McDonalds to raise their prices an average of 4% in the last 12 months, its margins are still healthy because of its size. It has also diversified its menu away from burgers and fries non-meat items like coffee, salad, ice-cream, deserts and now cappuccinos.
After the Q3 Earnings Report, Standard & Poor changed their McDonald’s rating from “Hold,” to “Buy” noting that McDonald’s was taking market share away from full-service restaurants.
In the current gloomy economic climate, it makes sense that consumers want cheap meals without the expectation of leaving a tip, but it doesn’t explain McDonald’s dominance over other low cost fast food chains, like Burger King.
To understand the success and the resilience of McDonald’s you simply have to go there, and observe the profile of the customers. I ate lunch at McDonald’s an hour ago (Angus Burger with Bacon & Cheese, Iced Coffee, Strawberry Sundae: $9.58). In front of me, there were two young mothers with toddlers. To the left was an older gentleman with a tattered jacket nursing a coffee. To right there was a line-up of young men and women in business suits, ordering burgers and salads and disappearing out the front door.
McDonald’s has successfully positioned its brand to appeal to three different socio-economic groups, without confusing its message. They are a destination for families with children, people who are short of money, people who are short of time. And those are three solid groups. There are always people with children. There are always people who are short of money. And there are always people in a hurry.
But that’s not all that McDonald’s is doing well. For a $60 billion corporation the company is remarkably nimble in the way that it morphs to appeal to the specific cultural nuances of different markets. For instance, last week I spotted several “McInternets” in South America. In Bangkok, Thailand they have “McCafes” which compete directly with Starbucks (SBUX).
Buenos Aires, Argentina is home to 310,000 Jewish people. A few years ago, McDonald’s opened a kosher restaurant there, the first one to exist outside of Israel. Astonishingly McDonald’s is equally popular with consumers aged 12 to 64. I cannot offhand think of another product or service with that kind of demographic and age reach.
McDonald’s is not – in the near future – going to be a five bagger. It probably never will. In markets like these, where stock picking is like waltzing through a minefield, you could do a lot worse than investing in a deeply branded multi-national company with surging profit.
At Q1 Publishing, we believe a market rebound will come. In fact, we still continue to recommend slowly wading into the market, but be prepared for darker days ahead. McDonald’s does prove that the world is not coming to an end. Even in these tough times, there are companies with a proven ability to survive and profit from economic downturns.