Food-industry giants McDonald's and Coca-Cola report substantial declines in earnings as consumers aim to purchase healthier, more sustainable products.Getty Images
Warning: Salt, sugar and fat could be harmful to corporate health.
Two food industry giants on Tuesday reported slipping profits, partly due to consumers turning away from fast food and soft drinks in favour of healthier, more "natural" food.
McDonald's Corp. reported a 30-per-cent decline in earnings in the third quarter. The fast-food chain was affected by a quality crisis in China, where a report showed a supplier repackaging rotten meat, and falling demand in the U.S., its largest market. President and chief executive officer Don Thompson said the restaurants have not kept up with changing consumer demand for locally-sourced, natural food and the desire to customize their meals.
Coca-Cola Co.'s earnings fell 14 per cent in the third quarter, driven by weakness in North America. While Coke won market share in carbonated beverages, overall volumes declined as people are drinking less pop. Coke issued a statement, saying it expects to miss its long-term earnings-per-share growth targets for this year. It also announced measures to cut costs and streamline operations.
While they are not the only concerns affecting both of these giants, consumer attitudes toward health and sustainability have become more common weapons for competitors.
At-home soft-drink maker SodaStream International Ltd., which uses reusable bottles, has slammed the pop industry for being environmentally irresponsible. Last week, Clorox Co.'s Brita brand of water filters launched an ad showing a city built out of sugar cubes – a visual representation of how much sugar a regular pop drinker consumes in his or her lifetime.
Chipotle Mexican Grill Inc. has built its advertising around criticism of factory farming, pitching its chain of restaurants as a different kind of fast food. On Monday, chairman and co-CEO Steve Ells tore into his competitors during an earnings call with analysts, after Chipotle reported 19.8-per-cent growth in sales.
"The traditional fast-food sector has traded food quality and taste for low cost and ease of preparation," he said, adding that younger consumers aren't buying it. "… They are more concerned with how food is raised and prepared than previous generations, and are willing to seek out and pay a little more for something they recognize as better – better tasting, better for the environment, and better for their well-being."
The trend toward healthier foods has been in the works for more than 20 years, said Steve West, an analyst with ITG Investment Research who covers the restaurant and grocery industries. The difference now is that players such as Starbucks, Panera Bread and Chipotle – which have built a reputation for using higher-quality products – have become big enough to pose a real threat.
"It's no longer a fad. It's a secular shift," Mr. West said. "People are trying to eat healthier. It's not just about calories any more. It's more and more about where is that food from? What is in that food I'm about to eat? People care now."
What's more, the consumers who tend to care are those with higher incomes, who can afford to spend more. They have weathered the economic downturn better than lower-income consumers who are McDonald's core target, he said. And they are driving change.
"Whole Foods is another example," Mr. West said. "They got to the size where they were shaking the industry up … and now you can buy natural organics at Wal-Mart."
Both Coke and McDonald's are attempting to respond. Coke CEO Muhtar Kent told analysts on Tuesday that the company has "more work to do on diets and lights" and is exploring different sugar-alternative sweeteners. It has also increased its marketing spending this year. Its advertising has attempted to address health concerns, as well as the desire for personalized products.
McDonald's is trying to rebuild trust in East Asia following the incident with its supplier, and to address quality concerns worldwide. Last week, its "Our Food. Your Questions" ad campaign, which was created in Canada, launched in the U.S. It is also beginning to introduce a concept called "Create Your Taste," to offer visitors the ability to customize their meals.
"Health and wellness, defined by many of the customers that we talk to … it's translated into real and fresh, in many cases, and that has been a major driver of our strategy as we move forward," CEO Mr. Thompson told analysts. "… They want to make sure that I know what's in it, where it came from and the integrity of those sources."
McDonald's revenue fell to $6.99-billion (U.S.) in the three months ended Sept. 30 from $7.32-billion during the same period last year. Profit declined 30 per cent to $1.07-billion or $1.09 a share.
Coke saw operating revenue fall to $11.98-billion in the quarter from $12.03-billion last year. Profit fell 14 per cent to $2.12-billion or 48 cents a share.