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McDonald's is weathering recession, but will Americans still eat there when it's over?

Analysts says Americans’ tendency to trade down to cheaper places when do eat out during a recession helped McDonald’s weather the financial storm. The next question is, will people keep eating there when their discretionary income returns?

MARCIO JOSE SANCHEZ | Associated Press

Analysts says Americans’ tendency to trade down to cheaper places when do eat out during a recession helped McDonald’s weather the financial storm. The next question is, will people keep eating there when their discretionary income returns?

Now that the recession is most likely over, it's time to start looking at which companies, institutions, and individuals thrived during this grim period.

In the harsh downturn that began in December 2007, success was redefined — flat became the new up, and muddling through became a triumph. In a recession that hit all rungs of the income ladder and ravaged the wealthiest consumer markets — the United States, Europe, Japan — there were very few safe havens.

But some countries, such as Peru, managed to grow right through the global recession. And some companies arranged their business so that they resisted the contraction and benefited from trends affecting their industry. Some even managed to make decisions during the trough that brought in more business.

Chief among the Great Recession's winners is McDonald's. McDonald's sales growth in 2008 was greater than in 2006 and 2007. While many restaurants scaled back, it opened nearly 600 stores in 2008. And the chain has notched same-store-sales growth in each of 2009's first seven months.

In late 2007, an age of trading up, spreading food-snobbery, and rising health-consciousness, it was easy to write off the golden arches. Greasy, downscale, industrialized, aggressively unhealthy, McDonald's was a ripe target for popular-culture agitators, such as Eric Schlosser (Fast Food Nation) and Morgan Spurlock (Supersize Me). One couldn't imagine Barack Obama stopping in for coffee and a quarter pounder, the way Bill Clinton used to after a jog. And yet, McDonald's has done quite well in a very difficult period for large corporations.

Over the last three years, its stock has handily outperformed the S&P 500, and the company's investor-relations site proclaims that it is "firing on all cylinders." McDonald's success can be chalked up to a combination of luck— which is the residue of smart planning — and savvy moves.

In 2008, after a decade of relentlessly trading up to higher quality (read: more expensive) consumer goods and services, Americans began to trade down with a vengeance. McDonald's, which has 44 percent of its 32,000 stores in the United States, was set up to profit from trading down in two ways.

First, in a recession, people eat out less and at home more frequently. And when they eat out, they eat at cheaper places. McDonald's is so cheap, efficient, pervasive, and convenient that it was a viable alternative to casual restaurants like Ruby Tuesday and to cooking at home.

When discretionary spending plummets rapidly, as it did during the recession, firms slash prices — and hence margins — to keep customers coming through the doors. McDonald's ran plenty of bargains and distributed gazillions of coupons. But it also spent money promoting a higher-margin good that could appeal to a new class of trading-down consumers: coffee. As consumers jettisoned their $4-a-day latte habits, Starbucks retrenched. But McDonald's expanded its java offerings. The McCafé line may not be attracting coffee snobs, but it has impressed some, including Slate's tasters.

In its 2009 second-quarter earnings release, McDonald's cited the "national launch of the McCafé premium coffee line-up" as a contributor to solid results. Over the past two years, McDonald's stock has ground Starbucks into a fine powder.

McDonald's has also performed well outside the United States. In Europe, where stressed consumers are still pulling back, McDonald's notched 6.9 percent same-store-sales growth in 2009's second quarter. "McDonald's Europe delivered strong second quarter comparable sales led by performance in the U.K., France and Russia," the company said. The Financial Times this month cited the company's "tiered menu — which offers cheap, middling and expensive options."

But the global story isn't only about trading down. In the United States, McDonald's may be a cheap source of calories and comfort food. In other parts of the world — parts where billions of people live — McDonald's is an aspirational brand, identified with middle-class, Westernized consumerism. Much of the world — places such as China, India, Indonesia — remains virgin territory for the golden arches. Coincidentally, these are economies that have continued to grow during the global recession. While it faces operational challenges in emerging markets, McDonald's has benefitted from a weakening dollar and rising incomes in Asia. The Wall Street Journal reported recently that McDonald's "has opened 286 units abroad so far this year, compared with just 53 domestically." The company plans to add 150 stores to its total of 1,000 in China.

The question now for investors is whether McDonald's can survive the recovery. When people feel more flush, will they still stop by? The growth in same-store sales in the United States has moderated a little in recent months — up only 2.6 percent in the United States in July compared with 6.1 percent in April. And there's a rising chunk of the population that has grown accustomed to eating healthier and better; my 10-year-old won't touch a McDonald's burger. Going forward, McDonald's may face larger cultural barriers in the United States than in China.

Daniel Gross is the Moneybox columnist for Slate and the business columnist for Newsweek. His latest book, Dumb Money: How Our Greatest Financial Minds Bankrupted the Nation, has just been published in paperback.

McDonald's is weathering recession, but will Americans still eat there when it's over? 08/15/09 [Last modified: Saturday, August 15, 2009 4:31am]
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