McDonald's (MCD) had a tasty 2010. Sales of its iced fruit drinks and frappes helped boost traffic to its stores, and its fourth-quarter profit rose 2.1% to a sweet $1.24 billion.
But the outlook for 2011 isn't so clear: Food prices are climbing, and even McDonald's can't hide from that. Also, U.S. unemployment remains stubbornly stuck above 9%, meaning fewer households can afford to supersize their orders.
DailyFinance chatted with McDonald's Chief Financial Officer Peter Bensen about food prices, strategies for growth and the company's evolving menu. Here are some excerpts from our conversation:
DailyFinance: With U.S. consumers remaining so cautious, how did McDonald's manage to grow in 2010?
Bensen: The success over the last several years has been driving the top line and, especially in 2010, a real focus in driving guest counts into our restaurants. That led to market share growth.
The McCafe beverage and the launch of frappe and smoothies helped drive traffic. Typically when we roll out a new product, customers tell us maybe 20% of visits are incremental -- they wouldn't have come without the new product. With these beverages, it's more like 40%.
Also, in January, we introduced the dollar menu at breakfast, which helped jump-start growth in the breakfast area.
Can you keep it up in 2011?
We're actually viewing 2011 as pretty similar to 2010. From data I saw the other day, they expect a slight increase in the market for eating out in the U.S., from a traffic perspective.
There is the potential that the economy will rebound. We'll have contingency plans to deal with that. Going into 2009 we had a lot of contingency plans for economy getting worse. We're now on the other end of that thinking.
McDonald's is a global company. Where in the world do you see the most potential for growth?
From a unit growth perspective and in terms of growth rate, it will continue to be Asia Pacific, Middle East and Africa. We're adding 150 to 200 restaurants in China and 625 in the total region. It's a pretty significant growth rate in terms of units, and the units are improving their profitability. That's our opening plan for 2011.
That's a lot of Chinese stores. How important is China to you?
China is extremely important from the long-term perspective. One point 3 billion people and growing, plus there's the whole concept of urbanization in the next 20 years. That looks like a pretty good quick-service restaurant market. But today it's only 3% of our income.
Our whole strategy in China is about building out our mass in the major cities and moving from the city centers to the outer rings and developing drive-throughs. That is not something that exists [in China].
Ten years ago, nobody would have thought about buying a salad at McDonald's. What changes do you see in food tastes?
The consumer is looking for more choice. Look at our recent launch of oatmeal. There were probably consumers who weren't coming to McDonald's for breakfast because we didn't offer choices like oatmeal. Look at things we've done like our beverage launch, salads, things like that.
Consumers are looking for more choice even though, over the past 20 or 30 years, hamburgers, soft drinks and French fries are still the top items that people consume.
Walmart (WMT) recently announced it was lowering sodium in its foods and cutting prices on fresh produce to promote healthy eating. Will McDonald's do something similar?
We absolutely think we need to be part of the solution. We get to that by offering choice and variety in our menu -- giving people the option to have oatmeal if they don't want an Egg McMuffin or hotcake that morning.
If we can also develop products where we can continue to provide the same great taste and improve the nutritional profile -- like reducing sodium -- we're absolutely going to pursue that.
You've said McDonald's will raise prices in 2011. Are higher food and commodity prices here to stay?
In 2011 in the U.S., we're expecting costs to be up 2% to 2.5%. I'd throw that into a bucket that I'd call "a normal year" of food inflation for us. With emerging markets getting more prosperous and consuming more protein, we're probably in for a period of continuous modest growth.
In the past, you've seen a lot of speculation or investors going into the markets causing a lot of volatility and in some cases spikes in prices. Now, we're probably going to see a situation where these markets are more driven by fundamental demand.
What are you going to have for lunch today?
I haven't decided yet! I did have an Egg McMuffin and apple dippers for breakfast. We have a McDonald's right here in our building. It might be a BBQ Angus or a grilled chicken salad. Depends on how I'm feeling.
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