RE: enewsguru's article: "...and the Golden Arches strike again!"

McDonald’s success does not depend solely on its pricing strategy in the U.S. but also on the combination of its global business expansion and several other factors.

If we look closely at McDonald’s business segments, we will find that in 2008, more than half of the total sales growth was attributed to the global sales from Europe, Asia-Pacific, Middle East and Africa, which amounted to 17.5% regional sales growth. The operating income in these areas also rose in double-digit proportions while the U.S. merely had growth of 8%, which was partly reflecting an increase in McDonald’s menu price. In addition, among all of McDonald’s business segments, Asia-Pacific, Middle East and Africa were the boosters of McDonald’s revenue in the fourth quarter in 2008 at 10%, which doubled that of the U.S.’s.

Another reason for McDonald’s strong sales growth is the sharp fall in commodity price in the second half of 2008 which significantly reduced its operating costs, including the cost of bread, potatoes, corn, etc. Moreover, the continued strengthening of the U.S. dollar in the second half of 2008 also benefited the conversion of foreign currencies’ into U.S. dollars from McDonald’s overseas businesses. This foreign-currency translation contributed an extra 2% increase to its earning from 2007 to 2008.

Although McDonald’s 2008 earning was impressive, it still faces some risks in 2009. For example, its business may be weakened by the strong U.S. dollar, as a strong U.S. dollar makes McDonald’s item prices relatively more expensive than those in the local restaurants in regions outside the U.S. Since food prices are volatile as they are vulnerable to changes in weather, an unexpected spike in food prices is possible at anytime of the year. Moreover, as many European and Asia-Pacific countries reported lower economic growth and employment rates, a drop in consumption expenditure may exert an adverse impact on fast-food chained restaurants such as McDonald’s.

Therefore, there is a chance that McDonald’s luck and management skills reflected in its strong earning in 2008 may not be able to be carried over to 2009. While applauding for McDonald’s success in 2008, investors should also pay attention to its downside risk.