By ANNIE GASPARRO
It is clear the economy is struggling when Americans can't even splurge for a Big Mac.
While McDonald's Corp. is expected to report an increase in first-quarter profit on Friday, Wall Street analysts fear the fast-food company's sales trends won't be so hot.
McDonald's, the world's largest restaurant chain, with more than 34,480 locations, has been fighting declines in customer traffic in the face of lackluster consumer spending world-wide. Chief Executive Don Thompson warned that the company's profit growth will be tempered this year as the chain sacrifices margin in order to better compete for cost-conscious consumers.
McDonald's sales at locations open at least 13 months have improved since it began advertising its Dollar Menu more aggressively in January. McDonald's realized a need for more emphasis on value last year after its promotions of higher-priced menu items weren't "resonating with consumers," Mr. Thompson said.
Typically, investors look to McDonald's for a broad sense of how the global economy is affecting consumers. To put it simply, if McDonald's can't sell a $1 cheeseburger, that doesn't bode well for the rest of the industry.
"Value is critical right now," said Lynne Collier, restaurant analyst at Sterne Agee. "The consumer is still very weak, facing higher gas prices, the payroll tax increase and employment barely inching up. Value is the No. 1 driver of traffic, and all these restaurant companies are dying for traffic."
This week, all eyes will be on Mr. Thompson to see whether he maintains his bleak outlook for the fast-food sector. In January, he said growth in the industry had been "relatively flat to declining around the world," and that he expected that to continue.
Analysts, on average, estimate McDonald's first-quarter same-store sales will be down 1% globally, and that revenue will rise 1%, according to Thomson Reuters.
"As far as the stock goes, it's all about expectations, and expectations are pretty low because we know the consumer isn't very strong, and March wasn't a good month for the quick-serve industry as a whole," Ms. Collier said. She expects McDonald's to do better than its peers, after showing signs of gaining market share in the U.S. in February. Even though its sales trends weren't strong, McDonald's performed better than competitors.
McDonald's shares have rebounded this year after falling 10% in 2012. In New York trading Friday, they set a new closing high of $103.59.
McDonald's outperformed other restaurants during the recession, too, by continuing to invest in restaurant remodels and new menu items—including both value-oriented burgers and snacks, as well as higher-margin salads and smoothies.
McDonald's now faces more intense competition, as its rivals mimic its strategy and menu. "There is so much marketing and messaging out there to consumers, it becomes harder to break through and really come up with a compelling offering that drives people to stores, and also builds loyalty," said Ted Marzilli, CEO of YouGov BrandIndex.
McDonald's hopes its pipeline of new products, like the recently launched "Premium McWraps" and specialty drinks later this year, will keep it one step ahead of other U.S. chains.
Consumer research by YouGov BrandIndex shows that consumers' perception of value at McDonald's has improved in the past two months.
McDonald's ushered in the new year with a Grilled Onion Cheddar Burger added to its U.S. Dollar Menu and began advertising those items more heavily. Analysts say the move has helped McDonald's fare better than they thought it would in light of the soft industry demand.
Wendy's Co. followed suit with a new "Right Price, Right Size" value menu, making a bigger push for cash-strapped consumers, and Burger King Worldwide Inc. temporarily lowered the price of its Whopper Jr. to $1.29 to be more competitive in that category. Burger King last week said its same-store sales fell 1.5% globally in the first quarter. While the damage was twice as bad as analysts expected, Burger King said its sales trended upward in March, once it, too, began promoting value.