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McDonald's posts rare sales drop, promotions questioned

A McDonald's sign is shown at the entrance to one of the company's restaurants in Del Mar, California September 10, 2012. REUTERS/Mike Blake
A McDonald's sign is shown at the entrance to one of the company's restaurants in Del Mar, California September 10, 2012. REUTERS/Mike Blake

By Lisa Baertlein

(Reuters) - McDonald's Corp's first monthly global restaurant sales decline in nine years is likely to force the world's biggest hamburger chain to increase promotions for its value menu, but some analysts doubt whether a hyper focus on low prices is the right strategy.

The loss of customers to rival chains such as Burger King and Taco Bell is a huge test for CEO Don Thompson, who took over in July when the chain was enjoying a multi-year run of rising sales and profits.

McDonald's shares touched a 52-week low on Thursday after the company said October global sales at established restaurants posted their first monthly decline since March, 2003. Shares are down more than 15 percent from their all-time high.

Several analysts predicted McDonald's would ramp up value-oriented promotions to stop market share losses.

"We anticipate management to respond quickly with heightened advertising to emphasize its value offerings," Lazard Capital Markets analyst Matthew DiFrisco said.

Others said the October results showed such a strategy would not work.

"Obviously, it's not working," Investment Technology Group analyst Steve West said of McDonald's current value focus.

Smaller and nimbler hamburger chains such as Wendy's Co and Burger King Worldwide Inc have generated excitement by cranking out tempting new products.

Yum Brands Inc's.N> Taco Bell also has a successful new Cantina Bell menu and the new pan pizza from Domino's Pizza Inc has been a hit, West said.

A year ago, McDonald's was expanding its McCafe beverage line and bringing in customers with one new product hit after another. Now, it's promoting cheddar bacon onion premium sandwiches and plans to bring back the McRib - a cult favorite - for a limited time later this year.

"Where's the excitement? People like to try different things," West said.

McDonald's said October sales at worldwide restaurants open at least 13 months dropped 1.8 percent. Last month, the chain famous for its french fries, Big Macs and Chicken McNuggets warned that a weak global economy has heightened competition as diners are less eager to spend money on restaurant food.

"McDonald's has been out there promoting price ferociously now for quite some time," said Emil Brolick, president and CEO at Wendy's.

On Thursday, Wendy's reported a small rise in same-restaurant sales for the third quarter, helped by new products like its bacon portobello melt sandwich.

A HIGH BAR

McDonald's is in many ways a victim of its own success, said analysts. For now, they are giving a pass to Thompson, the new chief executive.

For years, McDonald's has set the bar for growth ever higher by outpacing rivals and turning in strong sales despite modest consumer spending around the world.

"This has nothing to do with Don being in charge. It's just a matter of bad timing and bad luck," Edward Jones analyst Jack Russo said. He also said superstorm Sandy, which hit the U.S. Northeast at the end of October, could weigh on November sales.

Analysts said it will be difficult for McDonald's to put up higher same-restaurant sales until spring because year-earlier results were so strong.

McDonald's shares touched a 52-week low of $84.96 on the New York Stock Exchange, and closed down 2 percent at $85.13. Shares in Wendy's gained 3.1 percent to $4.39.

October sales at McDonald's restaurants open at least 13 months fell 2.2 percent in both the United States and Europe, and dropped 2.4 percent in the Asia/Pacific, Middle East and Africa (APMEA) region.

While the sales declines were expected, they were steeper than Wall Street estimated in the United States and Europe.

Many U.S. restaurant companies, including investor favorite Chipotle Mexican Grill and McDonald's, have reported cooling demand as diners get more frugal.

A few weeks ago, McDonald's posted its slowest quarterly restaurant sales growth in nine years.

(Reporting By Brad Dorfman in Chicago and Lisa Baertlein in Los Angeles; Editing by John Wallace, Maureen Bavdek and David Gregorio)

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