Why McDonald’s Caffeine Problem Is Hurting Its Business


Does McDonald’s Corp. (MCD) have a drinking problem that’s hampering its performance?

Over the past few years, McDonald’s has made a broader beverage offering a key priority, adding fancy coffee drinks and smoothies in a bid to capture some of the caffeinated customer traffic from Starbucks Corp. (SBUX) and Dunkin’ Brands Group Inc. (DNKN).

Related: Starbucks Set to Change the World, Again!

Howard Penney, managing director and restaurant analyst at Hedgeye Risk Management, blames this effort in large measure for the burger leader’s sluggish sales trends over the past two years.

“They went too far on the beverage initiative beginning in 2009 and really hurt the core business,” says Penney in the attached video. “They’re really losing customers at lunch and the stores are a little too inefficient because of the distractions they’ve put into the stores.”

With separate hot- and cold-beverage stations behind the counter, back-end workflow has been complicated. And yet Penney, who has followed McDonald’s and the restaurant industry since the 1980s, believes McDonald’s management is preparing to “double down” on the coffee push.

View photo

McDonald’s will host an investor meeting on Thursday, and Penney thinks it’s likely that the company will “declare a coffee war in 2014,” trying to grab market share from Starbucks and Dunkin’ by undercutting their prices on espresso-based coffee drinks.

Penney says the fast-food incumbent has “an obsession with Starbucks’ business model.” That, he adds, isn’t a bad thing in itself, given the enormous growth, profitability and customer loyalty under founder Howard Schultz. But it’s important for a company to play to its own strengths.

“McDonald’s is known for food first, beverages second. Starbucks is known for beverages first, food second. Whenever you deviate from your core competency, something has to give,” he says. “McDonald’s is all about speed of service and whenever you’re distracted by doing things other than selling burgers, fries and Cokes, it really hurts their ‘throughput’.”

Even on the food front, of course, McDonald’s has gone quite a while without a true, enduring blockbuster new product, even as its menu has become overcrowded. Penney figures some 150 new menu items have been introduced since 2003, as the chain tries to appeal to non-core customers with salads and wraps and chicken wings.

Meantime, competitors such as Wendy’s Co. (WEN), with its pretzel-bun burgers, and Yum Brands Inc.’s (YUM) Taco Bell, with Doritos-brand tie-in tacos, have produced hits by serving up more of what their most avid customers crave.

The company last week reported that October same-store sales rose just 0.2% in the U.S. and 0.5% globally, continuing a two-year trend of decelerating top line growth. McDonald’s shares have badly lagged the broader stock market and the otherwise-strong restaurant industry.

Of course, McDonald’s has undergone periods of strategic muddle in the past, namely when it belatedly recognized a decade ago that it was expanding too much in slow-growing markets and curtailed store growth. And with a sturdy balance sheet, ample cash flow, and a 3.3% dividend yield, conservative investors might see the coffee cup as half-full for the stock.

Penney is skeptical, though. “I wouldn’t own it,” he says. “I think it will underperform.” Until, perhaps, McDonald’s brass addresses its drinking issues.

More from Breakout:

Regulatory Inc: The Industry of Big Government is Booming

It's Not Me It's You! Lululemon Co-Founder Criticizes Customers

Obamacare Website Is the Tip of the Iceberg as Uncle Sam Catches Up on Tech


View Comments (2920)

Recommended for You

  • Obama to GOP: 'Stop just hating all the time'

    KANSAS CITY, Mo. (AP) — Pointing the finger at Republicans for congressional inaction, President Barack Obama chided lawmakers Wednesday for spending the waning days before their month-long summer break trying to sue him rather than addressing economic issues that could boost the middle class.

    Associated Press

    Argentina's stock market is tanking after the...

    Business Insider
  • The Lipton twist on a lemonade stand.

    The Lipton twist on a lemonade stand. #BeMoreTea

  • Airbus adamant no room for more talks in cancelled Japan jet deal

    Airbus on Thursday said its decision to cancel a $2.2 billion jet order from Skymark Airlines was final, rejecting the Japanese carrier's suggestion that talks were still ongoing. The European aircraft maker said this week it had informed Skymark that its purchase of six A380 superjumbos "has been…

  • In San Francisco real estate, $1M won't buy much

    SAN FRANCISCO (AP) — San Francisco Association of Realtors President Betty Taisch has two words of advice for those who want to live here and think $1 million will buy them their dream house: Think again.

    Associated Press
  • Tesla posts 2Q loss, prepares Nevada factory site

    PALO ALTO, Calif. (AP) — Electric car maker Tesla Motors widened its loss in the second quarter as it prepared for the launch of a new SUV and started work on a massive new battery plant.

    Associated Press
  • US warns against traveling to Ebola-hit countries

    NEW YORK (AP) — U.S. health officials on Thursday warned Americans not to travel to the three West African countries hit by an outbreak of Ebola.

    Associated Press39 mins ago
  • 4 Unusual Savings Strategies That Really Work

    It's just one of those facts of life: Saving money can be really hard. If you're trying to save and not getting ahead, it might be time to try one of these easy, everyday savings habits that will help you tighten your finances.

    U.S.News & World Report LP
  • Play

    Why Do Millennials Prefer Cash to Investing Money?

    In the last year, the S&P 500 delivered 17% and cash investments delivered 1%. Which would you rather have? In a Bankrate study, millennials said they'd rather have the cash. The Mutual Fund Store's Senior Vice President of Investments Andy Smith joins Simon Constable on the News Hub to discuss.…

    WSJ Live
  • 5 Questions That Will Not Get You Hired

    The wrong questions can tank even the best interview. Here are five questions you should never ask in a job interview.

  • Wisconsin Supreme Court upholds 2011 union law

    MADISON, Wis. (AP) — The fight over Wisconsin Gov. Scott Walker's signature policy achievement, a law effectively ending collective bargaining for most public employees, ended Thursday with the state Supreme Court declaring it to be constitutional.

    Associated Press
  • Sanctions will damage Russia if not lifted quickly

    MOSCOW (AP) — U.S. and European sanctions against Russia's energy and finance sectors are strong enough to cause deep, long-lasting damage within months unless Moscow persuades the West to repeal them by withdrawing support for Ukrainian insurgents.

    Associated Press
  • Dow plunges as multiple worries vex investors

    NEW YORK (AP) — For stock investors, the red flags were everywhere on Thursday.

    Associated Press
  • Play

    Tesla's Earnings: What to Watch For

    Electric-car maker Tesla is scheduled to be released after the bell Thursday, and Mike Ramsey joins MoneyBeat with Paul Vigna to preview the results.

    WSJ Live
  • 3D Systems Shares Are Cratering

    Shares in 3D Systems were down more than 12% in...

    Business Insider
  • What SunPower Earnings Mean for First Solar and SolarCity

    After markets close Thursday, solar panel maker SunPower will report second-quarter results. Competitors First Solar and SolarCity are scheduled to report results next week.

    24/7 Wall St.
  • Summer means sizzling savings at

    Save big on appliances, apparel, lawn and garden, tools and more. For fun in the sun or a project in the shade, start your search at Sears.

  • Adidas shares plunge 13% after Russia warning

    Adidas shares tanked more than 13 percent after it cut its profit targets for 2014, warning "tensions" in Russia would hit its bottom line.

  • Bank of America ordered to pay $1.27 billion for 'Hustle' fraud

    By Jonathan Stempel NEW YORK (Reuters) - A federal judge on Wednesday ordered Bank of America Corp to pay a $1.27 billion penalty for fraud over shoddy mortgages sold by the former Countrywide Financial Corp. U.S. District Judge Jed Rakoff in Manhattan ruled after a jury last October found the…

  • Panasonic, Tesla to build giant battery plant in US

    Japanese electronics giant Panasonic and US electric vehicle maker Tesla Motors said Thursday they will jointly build and operate a huge lithium ion battery plant known as the Gigafactory. Under the deal, Tesla will run the operations at the proposed US-based plant, while its Japanese partner will…

  • 5 Little-Known Ways to Boost Your Retirement Savings

    Saving for retirement is no easy task. Fortunately, we have several tools and strategies that can help us reach our retirement goals. Maintain your asset allocation. When you begin investing you typically select an asset allocation that suits your risk tolerance and investment goals.

    U.S.News & World Report LP
  • Why You Should Prepare for the Next Bear Market Now

    The stock market is going gangbusters these days, with the S&P 500 close to surpassing 2,000 points. While the index may never fall back to that level, bear markets will one day hit us hard again. It's a good idea to develop a plan for the next bear market now, while your asset values aren't free…

    U.S.News & World Report LP
  • Can a Repair Shop I Didn't Use Send Me to Collections?

    Are you obligated to pay for car parts that a repair shop ordered after they gave you an estimate? And can they send you to a debt collector if you don't pay?