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McDonald's Sees Slowdown in Discretionary Spending

By Annie Gasparro While fast-food giant McDonald's Corp. (MCD) says consumers are becoming more cautious in discretionary spending, large rival Yum Brands Inc. (YUM), with its heavy concentration in China, says its earnings continue to power forward. Presenting at an investor conference Tuesday, McDonald's Chief Financial Officer Peter Bensen said the global market for eating out is stagnant right now, given the global economic environment. "In some markets it's slightly declining, some it's increasing slightly, but nowhere is the eating-out market growing robustly," Mr. Bensen said. "And so we are really focused on doing what we can to continue to drive transactions into our restaurants and value is the key portion of that," he added. However, McDonald's same-store sales in May, though they grew 3.3% world-wide, didn't live up to expectations. "Primarily, we were going up against one of our best comps from last year in May," Mr. Bensen said. "But we are seeing a little bit more of a cautious consumer." McDonald's has said that inflationary pressures in the U.S., economic uncertainty in Europe and slowing economic growth in China are weighing on its earnings this year. "Over the last couple of months, as we look at our sales data, breakfast was continuing to do well, lunch was continuing to do well, but some of the more discretionary meals seemed to be where we weren't seeing as robust sales as we were in the past," Mr. Bensen said. Typically, that points to snacks, desserts and other occasions outside breakfast, lunch and dinner. In China, McDonald's recently came out with a value lunch menu, hoping to capture cost-conscious consumers as economic growth slows there. So far this year, McDonald's stock price has fallen more than 10% from its highs of above $100 in January. Shares closed down a fraction of a percent Tuesday at $89.60, in an otherwise positive market. Yum, parent company of KFC, Pizza Hut and Taco Bell, has also taken a hit recently from speculation regarding China's economic slowdown, since a large portion of its profits come from the emerging market. However, in a presentation Tuesday, Yum backed its long-term forecast of at least 20% profit margins in China, saying that initiatives like 24-hour service, delivery and other ways of increasing profitability of stores will help. The company also notes that as it gets more stores in the region, its supply chain will become more efficient, and it is building more locations in lower-tier markets, which return higher margins than the more-developed regions of China. Write to Annie Gasparro at annie.gasparro@dowjones.com

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