010308 McDonald's: Mad Cow Concerns Continue

Chicago - McDonald's Corp. said mad cow concerns continue to impact first- quarter sales in some European countries, but the company has seen a rebound in France, the first market hurt by the beef scare on the Continent.

"The consumer confidence issues are still there," Chief Financial Officer Mike Conley told investors. "Different governments are handling it differently."

Fast-food giant McDonald's, which last year got $9.29 billion, or 23%, of its yearly systemwide sales of $40.18 billion in Europe, is still facing consumer skittishness over hamburgers in Germany, Italy, Spain, Portugal and Greece, Conley said during an investor conference in New York sponsored by Merrill Lynch.

Mad cow, formally known as bovine spongiform encephalopathy, moved through British herds in the 1980s and since late last year has spread through several Continental European countries. A human form of the fatal brain-wasting disease is believed to be transmitted to people by eating tainted beef. No McDonald's products have been linked to the disease.

In the last week, another animal affliction, foot-and-mouth disease, was found in U.K. livestock, including cattle, sheep and hogs. The disease, which is highly contagious but rarely affects humans, has prompted several other European countries to destroy livestock imported from Britain as a precaution, though the disease has not been found on the Continent.

McDonald's saw its fourth-quarter profits fall 7%, due in part to European sales, which fell 10% to $2.21 billion from $2.45 billion the year-earlier period. European operating income fell 17% to $267.3 million from $322.2 million.

Conley did not mention foot-and-mouth during the presentation and company representatives were not immediately available for comment. The disease, which causes blisters in animals, can be fatal to younger livestock.

He also did not quantify the effect of the beef crisis on first-quarter sales. McDonald's recently abandoned its monthly sales update, he said, due in part to investors' tendency to focus too heavily on monthly trends. The next of the company's quarterly sales updates is due in about two weeks, he said.

In France, sales have "largely recovered," as the company strengthens its quality message and promotes items such as chicken and fish, Conley said.

McDonald's added about 500 new restaurants throughout European in 2000, and hopes to add the same number this year, Conley said.

"The variety we provide on our menu serves us especially well," he added, "allowing us to promote non-beef products."

Usa Outlook

McDonald's also provided investors with an overview of its strategy for the U.S. business, where it aims to double U.S. sales of $19.57 billion in the next 10 years.

To drive up U.S. sales growth, McDonald's plans to push through more menu innovations and take advantage of a recently installed made-to-order food production system in its nearly 13,000 U.S. restaurants.

It recently married its food development and marketing functions to stress this focus, placing its top menu developer, Tom Ryan, in its top U.S. marketing post.

The company is also experimenting with ways to drive up service times, such as cash-free and kiosk-based ordering. It is still in an investment phase in its non-McDonald's brands, which in the United States include the Chipotle Mexian Grill, Donatos Pizza and Boston Market chains, Feldman said.

"We're making food the star," Alan Feldman, president of McDonald's U.S. business, told investors. "We're balancing promotional efforts with an equally strong food focus, building a solid platform for ongoing stable growth."

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