At a time when market-driven dynamics are ruling the roost, global brands are doing all they can to bend their strategies and suit diverse market conditions. The world’s largest food service chain, McDonald’s, for instance is planning to tap the potential market of Canada not through its various fast food offerings but through McCafé ground coffee by making it available in the grocery chains. The chain began testing McCafé grocery sales in the United States last year and will launch there nationwide in early 2015. This push comes at a time when sales at established restaurants at McDonald’s globally have declined.
Even luxury brands across the world are facing the heat with changing market dynamics. A slowdown in China, once the sector’s core growth driver, has hit profits across the luxury goods business. Brands like LVMH, Prada have seen a dip in demand from Chinese buyers in its home market and overseas, as well as a slowdown in Hong Kong due to political unrest. However, that did not stop not stop luxury shoe brand Jimmy Choo, which is all set to attract investors promising industry-beating annual sales growth of more than 10 per cent on the back of aggressive expansion plans in Asia and elsewhere.
McDonald’s upping ante in various markets
McDonald’s Corp is making its McCafé ground coffee available in Canadian grocery, part of its larger campaign to win market share in a country long dominated by rivals like Tim Hortons Inc and Starbucks Corp. The competition to woo Canadian coffee lovers has intensified in recent years, while rivals have pushed into McDonald’s territory by expanding their own breakfast and lunch menus in order to attract customers and drive their spending per visit. “Everybody is trying to scramble for customers,” the chief executive of McDonald’s Canada, John Betts, said in a media report.
Tim Hortons, which claims to brew nearly eight out of every 10 cups of coffee sold in Canada, recently announced a new coffee blend, marking its introduction of a second blend after 50 years in business. Since taking over operations in Canada in 2008, McDonald’s has been able to double its market share in coffee and triple its coffee sales. The company launched the McCafé brand in Canada in 2011, and they claim that this move has helped turn around their business in Canada. The brand has registered double-digit growth on a compounded basis over the last five years at breakfast time, in terms of traffic and sales, which is a significant growth category. In fact, since its inception, McDonald’s has grown its share of the coffee market while opening only a handful more restaurants, compared with the hundreds opened by competitors. But with 78 per cent of coffee intake being done at home, according to the Canadian Coffee Association, there is a bigger market that McDonald’s looks to tap into.
Also the company is partnering with Kraft Canada to sell its bagged medium roast ground coffee, as well the single-serve formats for Tassimo and Keurig in grocery stores. The world’s largest fast-food chain began testing McCafé grocery sales in the United States last year and will launch the same nationwide in the United States by early 2015. The push into grocery stores comes as sales at established restaurants at McDonald’s have taken a sharp dip globally. The company has been grappling with internal missteps, brutal competition and shifting consumer preferences.
However, Betts feels that Canada is one of McDonald’s top-performing markets, and it is still seeing “significant positive momentum” in growth, though he declined to provide data. In Canada, McDonald’s restaurants have had to address tougher government restrictions on bringing in temporary foreign workers following an outcry over perceived abuses of the system.
Meanwhile, the company is testing new tablets that will allow customers to customise their own burgers. After posting the worst sales decline in a decade, the brand faces competition from fast-casual chains like Chipotle and Panera Bread. Results also show that young people, millennial and children, are wary of the brand. So the brand is making some drastic changes to improve business. McDonald’s is testing customisable burgers that can be topped with guacamole, bacon, or tortilla chips. This is a nod to Chipotle’s strategy, where customers build burritos to their exact specifications. In a bid to appeal to millennial last year, the brand introduced the McWrap. The wrap has between 360 and 600 calories and comes stuffed with chicken, veggies, cheese, and sauce. McDonald’s CEO, Don Thompson, says that the company is going to start paring down on items. The chain’s offerings have expanded by 70 per cent since 2007, which has contributed to an overwhelmed staff and longer wait times. In addition to trimming the menu, McDonald’s is also working on speeding up drive-thru wait times. The company is redesigning kitchens to make them more efficient for workers and is testing a mobile ordering app that allows customers to place orders from their phones and pick up in restaurants.
Luxury brands targeting more market visibility
Luxury shoe brand Jimmy Choo is all set to woo investors with a share market flotation prospectus. The brand promises industry-beating annual sales growth of more than 10 per cent led by aggressive expansion plans in Asia and elsewhere. The upmarket shoe maker, known for its stilettos worn by Hollywood and Asian stars alike, will decide in the coming days whether it goes ahead with the initial public offering (IPO), depending on market conditions. The brand is aiming for a listing at the end of October or early in November. The IPO, which could value Jimmy Choo at more than UK£ 700 million (US$ 1.14 billion), will be the first in the luxury sector since Moncler’s successful flotation in Milan last year and would add a third luxury name to London’s market after Burberry and Mulberry, which were listed in 2002 and 1996 respectively. But this time around, the environment has become more challenging, with flagging demand from the Chinese and the Russians and conflicts occurring in Ukraine and the Middle East. Cartier owner Richemont posted slowing sales growth, particularly in Asia, its biggest market. The luxury goods industry has been suffering a slowdown since the second half of 2012, with annual sales growth of the industry’s main listed stocks dropping to an estimated 5–6 per cent this year, from around 10 per cent in 2012. Jimmy Choo estimates that its future growth rates will likely remain above that of the industry as its compound annual growth rate (CAGR) for the past five years has been 10–12 per cent. The company’s average annual sales growth has been around 15 per cent in the past three years alone. The brand, which has around 130 directly operated stores, is planning to continue with its expansion spree by opening around 10–15 stores a year, as it did in previous years, mainly in Asia where it has a relatively small presence. The British brand aims to convince investors that Jimmy Choo offers an opportunity to get exposure to the high-end shoe market, one of the fastest growing sub-categories of the luxury goods industry. Consultancy Bain estimated the CAGR of high-end shoes to be around 10 per cent between 2008 and 2013, compared with the overall luxury industry average of 5 per cent. Jimmy Choo is expecting to make earnings before interest, tax, depreciation and amortisation (EBITDA) of around UK£ 50 million this year, on sales of UK£ 300 million, according to company sources.Assuming EBITDA next year will reach UK£ 60 million, it would imply a valuation of a little over 12 times next year’s underlying earnings, which puts Jimmy Choo on a small premium to the industry average of 10–11 times as well as to close to peer Salvatore Ferragamo, whose shares trade on a multiple of 11.5.According to industry sources, Jimmy Choo’s operating margins are roughly in line with those of Ferragamo’s, which is around 17 per cent. To quote industry and financial sources, if the IPO goes ahead Bank of America Merrill Lynch will act as global coordinator and as joint-book runner with HSBC. Bank of America Merrill Lynch declined to comment and Jimmy Choo and JAB also refrained from making any remarks on the same.
Meanwhile, Italian luxury goods group Prada S.p.A. posted a 20.6 per cent drop in first-half net profit, weighed by sluggish consumer demand amid an uncertain economic outlook and unfavourable exchange rates. The maker of luxury leather ware and Miu Miu brand said that its net profit for the six months ended July amounted to EUR 244.8 million (US$ 314.9 million), down from EUR 308.2 million a year earlier. Second-quarter net profit was EUR 139.5 million, lagging analysts’ average forecast of EUR 172.7 million. That compared with net profit of EUR 170.1 million a year earlier and EUR 105.3 million in the previous quarter. Prada’s shares fell 1.3 per cent in Hong Kong to their lowest in more than two years prior to the results. That lagged a 0.6 per cent rise in the benchmark Hang Seng Index. In August, Prada said preliminary consolidated net revenue gained 1 per cent year-on-year to EUR 1.75 billion in the six months ended in July, while its 566 directly operated stores achieved revenue growth of 5 per cent. The company said it would control costs to protect margins. A slowdown in China, once the sector’s growth engine, has hit profits across the luxury goods business. LVMH, for instance, has seen a drop in demand from Chinese buyers in its home market and overseas, as well as a slowdown in Hong Kong due to political unrest.