For McDonald's (MCD), something important has been lost -- the ability to grow in an era when diners are looking for food variety at a fair price.
When considering the Oak Brook, Ill.-based burger seller, it's necessary to avoid suggesting end times are at hand. The chain has almost $90 billion in system sales, which makes it the world's largest food brand by that measure, and an annual corporate profit above $5 billion, with more than 35,000 stores globally. But the Golden Arches have gotten to a growth plateau, maybe even a peak, and investors have to accept that. Traffic, though massive at what executives say is 70 million customers a day, has stagnated. And growth for any business, especially a publicly traded one, is key to its success.
Nothing indicates McDonald's current problems will change anytime soon, not with the latest quarterly report released Tuesday, which merely highlights a trend that's traceable back at least two years. What it shows is that, while McDonald's remains the biggest name in the restaurant group, fast food or otherwise, it's wobbling.
That doesn't mean McDonald's is going to sink as a corporation; as previously noted, its system sales remain huge. That's the enviable part. Not enviable is the weakness in same-store sales as potential customers spend their money at the many other options they have. In the U.S., there are about 1 million restaurants.
See related: Chipotle gets it right again, McDonald's not so much
Some of this is a function of what happens with extraordinary size, when growth naturally becomes a greater challenge. But that's not the entirety of it. As is the case for all restaurants, McDonald's has had to deal with higher costs to purchase the food it sells. In response, the industry has raised menu prices. At McDonald's itself, prices are up about 3% since June 2013, and for months, they've surpassed the U.S. average. That can't work forever at stores where affordability matters to patrons, meaning it's undoubtedly part of the reason customer counts declined last year after at least nine straight gains. That downturn is continuing.
As Chipotle (CMG), formerly controlled by McDonald's, has shown, high prices won't deter customers if they like what you're selling. What's being made apparent, time and again, is that McDonald's isn't Chipotle. During the most recent quarter, earnings and revenue for McDonald's missed Wall Street's estimates. Worldwide same-store sales were essentially flat, and traffic fell. Meanwhile, Chipotle's results exceeded expectations, and same-store revenue jumped 17.3%, mainly because of higher guest numbers. Those guests were already paying premium pricing to the Denver-based fast-casual burrito chain. Recently, that premium went up as Chipotle implemented various increases. Consumers still can't stay away. If the price is right for what you supply, customers keep buying. When it isn't, they don't.
The core McDonald's visitor hasn't necessarily abandoned eating out altogether, but some consumers are tired of McDonald's in general, concerned about the health effects of fast food or picking a similarly priced competitor instead. For decades, customers knew what they were getting at McDonald's, and that led to consistent expansion for the company. Then, in an effort to adapt to changing times and demands, McDonald's began offering new menu items, some permanent and some limited time, at a rapid rate. As it did, franchise owners eventually got frustrated, store operations became more difficult to manage and customers had to spend added time figuring out what to buy.
These days, it's trying to return most of its attention to the main menu and the biggest markets to reboot the growth that's vanished. However, if this were a simple problem to solve, the corporate leadership would just solve it. It's more complex, and the answers don't simply materialize.
McDonald's is succeeding in certain countries where it operates, which will need to continue if customers in large, developed nations go elsewhere. Unquestionably, the brand could carry on with a fraction of the guest base it has. But merely running in place isn't enough, not when investors are involved. They may have to finally become content with the prospect that McDonald's, as a stock, is primarily a place to park money for relative safety, rather than one to find gains. They do get the benefit of a dividend with a yield above 3%, and buybacks to help keep the shares steady, so perhaps McDonald's can be seen as an equity alternative to Treasury securities -- hardly a ringing endorsement.
On a conference call that followed earnings, several questions arose about how McDonald's can turn this around. CEO Don Thompson said the company has a "sense of urgency" about the business, saying its message of value, marketing that speaks of quality foods, and finding the balance between old standards and new products will be part of the plan. Digital strategies and meal customization are being employed. This generated yawns, and McDonald's stock lost 1.3% to $96.27. Since it reached a record high of $103.78 in May, the shares are down 7.2%. It's also now negative for the year. Chipotle, meanwhile, has climbed 23%.
A McDonald's location averages about $2.5 million in annual sales. That's well in front of most competing chains, and as long as it builds a few hundred stores a year, overall system sales will continue to rise. But can it bring in new, additional customers who repeat their visits? That's the question if it wants to truly grow as an enterprise and a stock.
Staying as it is, it will exist as long as there are restaurants. Investors will have to determine whether that's enough. Because if they want growth, that's gone to the Chipotles.
- Consumer Discretionary
- Investment & Company Information