- The Washington Times - Wednesday, April 22, 2015

There may be no more American a meal than a Big Mac washed down by a Coke, but the companies behind the menu are facing some big question marks as they try to stay relevant in an increasingly Chipotle-and-bottled-water world.

Once the twin symbols of U.S. corporate ingenuity, innovation and global branding might, McDonald's Corp. and Coca-Cola Co. are facing what McDonald's executives Wednesday called “macroeconomic headwinds” that are calling into question their traditional business models. After decades of market growth and expansion, both companies are seeking to shed unproductive assets and find new business lines to revive profits and adjust to sharply shifting consumer tastes.

With fizzy soda sales on a long-term decline and 63 percent of Americans telling a Gallup survey last year that they are actively avoiding traditional soda drinks, “we’re operating in a very challenging environment,” Coke CEO Muhtar Kent told analysts in a conference call Wednesday.

McDonald's, whose regimented production standards and quality consistency were once central to its identity, is struggling to connect with millennials who prefer healthier choices and more personalized options. The company is promising to give franchisees more latitude to experiment, while headquarters reportedly weighs changes such as all-day breakfast menus and even home delivery.

McDonald's CEO Steve Easterbrook, hired in March to revive sales and growth for the world’s biggest fast-food chain, is putting the finishing touches on a much-anticipated turnaround plan. The Oak Brook, Illinois-based company said Wednesday that it had “negative guest traffic in all major segments” for the first three months of the year.

“Where we need to fix the fundamentals, we need to act now,” Mr. Easterbrook told analysts in a conference call Wednesday.

“I’m not looking for incremental steps,” he said. “We intend to make meaningful impact with customers and how they perceive our brand and our food.”

A strong dollar and weakened consumer demand in Europe and other overseas markets have hampered both companies, but the real problem, analysts and investors say, goes deeper: Today’s customers aren’t buying what McDonald's and Coke traditionally sold, at least in the same vast numbers, and it’s hard to set a new course quickly to take on more nimble upstart rivals.

“They’re on it, but there are a lot of problems,” Yahoo finance columnist Rick Newman said of McDonald's efforts at a turnaround. “McDonald's is a huge company, a huge supply chain spread everywhere, and it’s kind of getting nibbled at the margins by all these upscale burger chains, organic places [and] locally sourced food.”

At Coca-Cola, dissident shareholder David. J. Winters of Wintergreen Advisers LLC has taken on Coke’s management over excessive pay and underperformance and this week questioned whether Mr. Kent’s team can restore the brand to its former glory.

Coca-Cola lags behind while other consumer brands like Heinz and Kraft pursue bold restructurings,” Mr. Winters said in a statement last week revealing the fund’s plans to vote against the company’s candidates for the board of directors. “Coca-Cola’s board and management lack a sense of urgency to address Coca-Cola’s problems and increase shareholder value.”

A long way to go

By coincidence, both McDonald's Corp. and Coca-Cola Co. on Wednesday released their first-quarter financial results, and the numbers suggest both companies have a long way to go.

A day after emerging rival Chipotle Mexican Grill said comparable-store sales were up 10.4 percent during the first quarter of the year, McDonald's announced that its per-location sales globally were off 2.3 percent during the quarter, while the decline hit 2.6 percent for the company’s 14,000 U.S. locations. The company made $811.5 million, or 84 cents per share, in the quarter, down from $1.2 billion in profits, $1.21 per share in the first quarter of 2014. Revenue totaled just under $6 billion, a 12 percent drop from the $6.7 billion the company brought in a year earlier.

After decades of aggressive expansion, the chain, now with 35,000 outlets worldwide, has been retrenching in recent years. Even before the turnaround plan was unveiled, the company said it would double the number of store closures this year to around 700.

Morningstar senior restaurant analyst R.T. Hottovy, speaking on CNBC Wednesday, called McDonald's latest numbers a “sort of kitchen-sink quarter of bad news,” intended to clear the decks for next month’s vaunted turnaround plan.

“The results show it’s not going to be an overnight turnaround story,” Mr. Hottovy said. “There are a lot of moving parts and a lot of significant investment [that] needs to be made.”

Atlanta-based Coke’s situation is not seen as so dire, even though U.S. carbonated soft drink industry sales fell almost 1 percent in 2014, the 10th consecutive annual decline, according to Beverage Digest. Coke, PepsiCo Inc. and Dr Pepper Snapple all lost market share last year.

Diet Coke, once one of the company’s most reliable moneymakers, has been particularly hit hard, with global demand falling 6 percent in the past year, even as Coca-Cola, Sprite and other product lines posted mild advances.

For the three months ending April 3, Coca-Cola Co. reported Wednesday a profit of $1.56 billion, or 35 cents a share, down 3.8 percent from a year ago. Global sales volume great at a modest 1 percent pace, the first growth in quarterly revenue in more than two years.

Coke officials have moved to trim some $3 billion in internal costs in the next five years, selling off bottling operations owned by the parent company, cutting executive pay and broadening the product line to include sports and energy drinks. The company has also been able to raise effective prices — in part by intensive marketing of smaller, higher-margin can sizes — to offset flat or falling sales.

Coke Chief Financial Officer Kathy Waller said it will take some time for the changes to show up on the bottom line.

“In a transition year, when you are starting to work on these initiatives and rolling them out, it takes awhile for that to fully kick in,” she told analysts Wednesday.

In part because analysts had been expecting even worse, shares of Coca-Cola and McDonald's saw a slight bump on Wall Street after the quarterly numbers were released. Coke’s stock closed at $41.31, up 53 cents or 1.30 percent, while McDonald's shares rose $2.97, or 3.13 percent, to end the day at $97.84.

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