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McDonald's testing plant-based burgers as US sales miss Q3 expectations

McDonald's Corp. is exploring the potential of plant-based burgers as the fast-food chain reported third-quarter U.S. same-store sales growth below analysts' expectations.

McDonald's is watching how consumers respond to testing in Canada of a plant-based burger, which is an area of interest for the company, President and CEO Stephen Easterbrook said during a call to discuss the company's third-quarter results Oct. 22.

McDonald's posted U.S. comparable sales growth in the third quarter of 4.8%. The sales growth lags estimates from both Stifel, which predicted 5.2%, and SunTrust Robinson Humphrey, which predicted 5.5%.

While McDonald's reported a boost in average U.S. customer check size, traffic was down for the quarter and remains the company's biggest opportunity, McDonald's CFO Kevin Ozan said during the call.

McDonald's fell below earning expectations for the quarter, reporting net income of $1.61 billion. Global comparable sales grew 5.9% during the quarter, ahead of analysts' expectations. But the U.S. comparable sales miss, coupled with earnings below Street estimates, sent McDonald's shares 5% lower in afternoon trading on Oct. 22 to $199.27.

McDonald's disappointing U.S. comparable sales likely reflected some negative share shift to competitors behind successful new product introductions like Restaurant Brands International Inc.-owned Burger King's plant-based Impossible Whopper and Popeye's Chicken Sandwich, Raymond James analyst Brian Vaccaro said in a report. Dunkin' Brands announced this week plans to roll out a vegan breakfast sandwich.

Even with the U.S. sales miss, the restaurant chain is expected to continue gaining U.S. market share with menu innovation and digital investments, SunTrust analyst Jake Bartlett said in a report.

Meanwhile, in Canada, McDonald's is in the early days of testing a plant-based burger in 28 restaurants in Ontario, a market that will give the company a good read across North America and developed markets in Europe, Easterbrook said. McDonald's announced Sept. 26 plans for a 12-week test of its P.L.T., which stands for plant, lettuce and tomato, and is made with a Beyond Meat Inc. patty.

McDonald's is interested in how flexitarians will approach the product and wants to get the taste, marketing and operations right, Easterbrook said. A flexitarian is someone who mainly eats a vegetarian diet but sometimes eats meat. McDonald's is aware of competitive activity in the space, which has helped create some of the immediate interest in plant-based menu items, Easterbrook said.

Another food trend McDonald's noticed is the increasing competition in the breakfast space, Easterbrook said. The Wendy's Co. announced Sept. 9 plans to expand its breakfast menu across the U.S. in 2020.

McDonald's was encouraged by third-quarter breakfast sales coming more in line with other parts of the day, Easterbrook said. Previously, breakfast had been behind other parts of the day.

Beyond what actually goes on the menu, McDonald's is bulking up the technology behind menus.

McDonald's acquisition of Dynamic Yield Ltd. in March was part of an effort to bring menu personalization technology to its restaurants. Dynamic Yield technology is now in more than 9,500 U.S. McDonald's drive-thrus and is expected to be in nearly every U.S. restaurant with an outdoor digital menu board by the end of the year. The technology is also being used at locations in Australia, where every existing drive-thru restaurant will have it by year-end.

"We're scoping future deployment for additional markets and applications, eventually including kiosks and our global mobile app," Easterbrook said. "Ultimately, Dynamic Yield will facilitate a range of personalization benefits where we can leverage knowledge of the customer and order patterns to provide a tailored experience in restaurants, at the drive-thru and on our app."