McDonald’s Income Flat Despite Arch Deluxe Blitz

McDonald’s Corp. reported flat second-quarter income in the United States on Thursday amid indications that its much ballyhooed Arch Deluxe hamburger for grown-ups is a disappointment.

The premium-priced burger was introduced in May with a $100-million marketing blitz to plug a gap in a menu that strongly appeals to kids but not adults. The company distributed thousands of coupons encouraging consumers to try at no charge the quarter-pound burger with lettuce, tomato and mustard sauce.

But McDonald’s has run into strong competition from rival Burger King, which has countered by discounting its flagship Whopper to 99 cents in many markets. The Arch Deluxe is priced above $2.

At the same time, the Arch Deluxe is having a tough time competing against sandwiches from Wendy’s International, which traditionally caters to adults with higher-priced fast food.

“It is interesting to see them give it away for free and do everything they can to encourage trial. It doesn’t seem to be having the kind of impact people who own the stock would like to see,” said Damon Brundage, an analyst with NatWest Securities in New York.

Brundage estimated that sales at McDonald’s restaurants open at least one year were down slightly in May and June, but up in the low-single digits at McDonald’s rivals Wendy’s International, which specializes in premium burgers, and Burger King, a unit of the British conglomerate Grand Metropolitan Inc. McDonald’s does not report same-store sales.

For its part, McDonald’s Thursday said that it is pleased with the Arch Deluxe and that sales have exceeded the company’s expectations. The company said that it has sold 100 million Arch Deluxe burgers in the last two months but would not say how many of these had been given away or sold at a discount.

McDonald’s said the Arch Deluxe had a favorable impact on domestic second-quarter sales, which were up 3% overall for the quarter ending June 30, compared with 9% for the same quarter a year ago. But in an interview with Reuters, McDonald’s Vice Chairman Jack Greenberg said it is too soon to say whether the Arch Deluxe is drawing in new sales or cannibalizing sales of existing menu items.

“I believe them when they say trial usage has been high,” said Joseph Doyle, an analyst with Smith Barney in New York. “It is going to take several months to sort out what repeat purchase levels are.”

Also helping to drive sales in the quarter was a massive expansion of McDonald’s restaurants. The company said that it added 611 restaurants during the three-month period, including 183 in the United States.

McDonald’s said that overall, income in the quarter rose 11% to $420.4 million on revenue of $2.67 billion, up 8% from the same quarter a year ago. The increases were driven by foreign sales, particularly in Australia, Japan, Hong Kong, England and Brazil. McDonald’s shares closed at $45.375 on the New York Stock Exchange on Thursday, up $1.125 but 16% off its 1996 peak.