McDonald’s Supplier Issue In China Lingers On



McDonald’s supplier issue in China

Previously in this series, we learned that McDonald’s (MCD) same-store sales have suffered across its three major segments—the US, APMEA (Asia Pacific, Middle East, and Africa), and Europe.

APMEA was dragged down by McDonald’s supplier issue in China. According to the company, Japan too was affected by the supplier issue, but Japan has experienced weak same-store sales for many years. For more on the supplier scandal, read Why McDonald’s took a big hit in China.

The company launched a “brand trust campaign” to get customers back into McDonald’s stores in the region. It’s also trying to attract cost-sensitive customers by offering more value meals. However, the company expects the effects of the supplier issue to linger on for another six to nine months.

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Other companies that were affected

As mentioned earlier, KFC, under the umbrella of Yum! Brands (YUM), Burger King (BKW), and Starbucks (SBUX), which have a presence in China, were affected by this scandal as well. Other restaurants included in the Consumer Discretionary Select Sector SPDR Fund (XLY) also took a hit in this market. But McDonald’s seems to have been more affected than other restaurants, as the chart above suggests.

We compared McDonald’s with fast-casual concepts such as Chipotle Mexican Grill (CMG), which has no presence in China. According to Reuters, CMG proactively suspended the pork supply to its stores when its supplier violated CMG standards.

Beyond China

McDonald’s Russian market showed negative same-store sales due to the uncertainty surrounding political and economic conditions in the country. According to the company, these conditions have negatively impacted customer sentiment.

In Australia, the company introduced a value menu called the “Loose Change Menu,” along with McCafe and drive-thru offerings. Although operations got back on track, the negative effect is expected to bleed into the fourth quarter, likely resulting in subdued same-store sales in this region.

All of the above is expected to impact the company negatively in the fourth quarter and into 2015. So a disappointing fourth quarter result shouldn’t come as a surprise.


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