By Paul Ziobro
Of DOW JONES NEWSWIRES
NEW YORK -(Dow Jones)- McDonald's Corp. (MCD) says it is gaining a bigger slice of a shrinking pie of fast-food dollars, and will rely less on raising prices to increase sales.
McDonald's new premium items like McCafe coffee and Angus burgers are both exceeding expectations, complementing the chain's existing value-menu to help sales as the economy remains weak.
McDonald's maintained solid same-store sales through September, with a 5.1% gain worldwide including a 3.2% jump in the U.S., helping the world's largest restaurant chain report third-quarter profit ahead of expectations.
About half of September's gain came from higher prices implemented earlier this year, a tactic that the company says it will use less at it has less room to raise prices. In October, the chain will lap a price increase from last year, taking the wind out of sales growth.
"Our pricing power is not what is was," McDonald's Chief Executive Jim Skinner said Thursday on McDonald's third-quarter earnings call. We "certainly can't pass on those price increases to our customers at this point in time where value is so important."
For October, McDonald's expects same-stores sales to be flat to slightly negative at its U.S. stores, though better results from Europe and Asia Pacific, Middle East and Africa regions should keep worldwide same-store sales positive for the month.
Investors have been closely watching U.S. same-store sales, wondering if McDonald's could top results from last year when it outperformed other restaurants as the economy contracted.
September results were encouraging, and McDonald's shares were recently up $1.63, or 2.8%, at $59.96, retreating a bit after discussing October expectations for its U.S. business. Shares of other fast-food chains also rose, with Wendy's/Arby's Group Inc. (WEN) rising 3.8% to $4.30 and Burger King Holdings Inc. (BKC) up 0.8% at $18.32.
As the economy improves, McDonald's says it thinks it can win back customers who have abandoned eating out altogether during the recession, making up for the customers who shift to full-service restaurants when the economy improves. "There's more people that will be coming back into the category who left us versus potentially trading back up," McDonald's Chief Financial Officer Peter Bensen said.
McDonald's Angus burger, at $3.99, is one option it is using to try keep customers from trading up, proclaiming in ads, "No reservation required," in a jab at its casual dining competition. The sandwich is selling well, lifting the average check and margins, especially given that customers buy the burger as part of a combo meal about 75% of the time.
But pricing competition is also ramping up within the fast-food segment, the "informal eating out market" that McDonald's says is declining worldwide. Burger King this week began selling its double cheeseburger for $1 nationwide, while other chains, including McDonald's, are also discounting and offering coupons. McDonald's will continue to promote its Dollar Menu, from which it gets around 10% of sales, which it argues presents a more consistent value message than one-time discounts.
"We don't jump in and out like other folks are," McDonald's President Ralph Alvarez said.
-By Paul Ziobro, Dow Jones Newswires; 212-416-2194; paul.ziobro@dowjones.com