McDonald’s has seen its springtime profits for Europe eaten away by $60m (£40m) despite forking out more than £8m to sponsor the Euro 2000 football tournament. Ironically, the fast-food chain says the competition is one of the main reasons for its profits drop.
The company’s European sales dropped three per cent in the quarter ending June 30 – from $2.39bn to $2.33bn (£1.6bn-£1.5bn) – compared with the same period last year. McDonald’s blames Euro 2000, saying that during such continent-wide sporting feasts, people tend to stay at home watching television, rather than suffering a “MacAttack” and heading for their nearest burger bar.
Some observers doubt this reasoning, believing it a lame excuse along with the “hot weather across the continent” line which the chain’s spindoctors have also used to explain the downturn. The sceptics see a more fundamental problem for McDonald’s – its reliance on short-term promotional tie-ups to entice customers.
The chain itself has admitted that its lack of a successful global promotion has contributed to disappointing sales, which may make marketers think again about whether it is worth diverting cash from above-the-line campaigns to invest in promotions.
Over the past few years, both McDonald’s and Burger King have put their faith in promotional giveaways, offering toys and film merchandise to pull in children and value meals to lure adults. But there is an inherent danger in this strategy. If Hollywood fails to come up with a summer blockbuster, or one of the companies is beaten to the best promotion deal by its rival, sales are bound to suffer.
Mitchell Speiser, a senior equity analyst for Lehman Brothers in the US, sums up the situation: “You’re only as good as your last promotion.”
Proof of the pudding, so they say, is in the eating, and McDonald’s says this year’s Beanie Babies promotion has not proved as successful as a similar campaign in 1999.
Burger King, while faring reasonably well in the UK and Europe, is also heavily reliant on promotions. Its tie-ins include The Simpsons and children’s TV cartoon craze PokÃ©mon. Burger King owner Diageo’s latest trading statement shows second half sales to June up two per cent in the UK, compared with June 1999, with first half results up one per cent.
A Burger King spokeswoman says: “We do see a halo effect from tie-ins. It gives us the opportunity to bring back customers who haven’t visited us for a while, and increase the frequency of visits of regular customers.
“But we want BK to be known for its great tasting food. Promotions could have a negative impact if people forget your brand’s core value.”
But Lehman Brothers’ Speiser believes chains are too reliant on promotions, which make sales more volatile and comparable results harder to predict.
He says: “Toys and tie-ins are a competitive advantage, but add risk to the business model.
“McDonald’s appears to be increasingly reliant on the strength or weakness of the previous year’s results. Non-food promotional activity in the US, UK, Germany, Japan and Hong Kong is becoming a critical driver.”
Speiser claims McDonald’s turned down the chance to market a tie-in with PokÃ©mon because it was “too violent” for the company’s family image. It may be regretting that decision now, since Burger King’s subsequent deal with PokÃ©mon is expected to prove a huge success when its next set of global results are published in September.
But the promotion has not been without its setbacks. The deaths of two young children in the US have been linked to plastic PokÃ©mon toys, which resulted in Burger King urging parents of under-three-year-olds to destroy the free gifts.
Sales promotion experts are divided by the tie-in issue. While the general consensus is that McDonald’s will continue with the strategy, there is doubt as to how profitable it really is.
Mark Ritson, an assistant professor in marketing at London Business School, believes sales promotion can have a long-term detrimental effect on brands. He says the main advantage of promotions is that they can demonstrate a sales increase more obviously than advertising or PR.
But he adds that, unlike advertising, promotions are mainly handled in house and failure cannot be blamed on a third party – such as a creative agency.
“McDonald’s is justified in pointing to sales promotion this year, as it has been a success in past years,” says Ritson.
“Blaming promotions is useful because it’s away from central operations. McDonald’s wouldn’t want to suggest the brand is losing its attraction and underperforming. But questions will be asked if it happens next year. Another problem is too much promotion, either through tie-ins or price, which can make people forget what the brand stands for.”
But some observers feel McDonald’s will continue to walk the promotions tightrope and bounce back.
Simon Knox, professor of brand marketing at the Cranfield School of Management, is an advocate of sales promotion in the fast-food sector.
“McDonald’s has embraced promotions, seeing the advantage of combining entertainment with its main function,” he says.
Knox believes tie-ins create excitement and interest in the brand, but says price-cutting does not add value.
He points to Wal-Mart’s price-cutting strategy, which, he says, will lose its advantage as other supermarkets follow suit.
“It’s not a sustainable strategy,” he says. “Stores will attract the wrong type of customer, who seek out price cuts like heat-seeking missiles. They are not rewarding loyal customers.”
Most observers agree that McDonald’s results are a blip and sales are already showing signs of recovery. But the issue has highlighted the pitfalls of relying on promotions in the already volatile fast-food sector.