When you're McDonald's (MCD), the challenges never really cease.
Some are potentially big, such as changing demands for food and worries about the detrimental health effects of too many burgers and fries. Others are potentially smaller, like saving a few seconds on order times. But taken together, they all mean constant stress for the Oak Brook, Ill., Big Mac chain.
This week another one was called out, and its name is Chick-fil-A. According to a well-known restaurant analyst, the Atlanta-based chicken-and-waffle-fries seller is poised to expand its sales so fast it may take a significant share of the growth that might otherwise have gone to McDonald's (the much larger of the two) in the years ahead.
And adding to that, the same analyst, Mark Kalinowski of Janney Capital Markets, separately said U.S. McDonald's franchisees are exceedingly gloomy about their prospects over the next few months. His research found complaints were common about the components of the menu and investments in store remodels, but more importantly, the owners haven't ever been this downbeat since he began his surveys. Worldwide, more than 80% of McDonald's 35,000 restaurants are franchised.
This doesn't entirely mean woe is McDonald's. Its pains clearly are relative. It has system sales of almost $90 billion, and its corporate profit last year was above $5 billion, so it's not at risk of falling apart. Even so, the pressure to adapt to 21st century dining will impact its operations and sales from here on. Key issues for the company, today and tomorrow, are:
Pricing. McDonald's has to keep from getting too expensive for its customers. It wants to be seen as a good value, which translates to providing quality at a reasonable price -- not simply being cheap. Inflation might not be everywhere in the economy, but it certainly has been seen in food prices. How do McDonald's and its franchisees balance higher costs to acquire the food they sell with what guests will pay? Last year, it raised average prices 3.1%, surpassing the broader national rate. That trend can't last.
We'll get a better idea of how this is developing as the still fairly new Dollar Menu and More, which replaced the previous Dollar Menu, takes greater hold. The next update will arrive Tuesday, when McDonald's reports what are expected to be quarterly earnings of $1.44 a share, with revenue of $7.3 billion. Sales have been slightly short of analyst expectations over the past four quarters, and last quarter the company missed on the bottom line.
Traffic to stores. Last year, the number of diners fell, something unheard of at McDonald's for at least a decade. Blame competition, altered opinions on fast food or dissatisfaction with McDonald's itself, as the brand notably has performed poorly in recent consumer surveys. Regardless of the reason or reasons, a shrinking customer base is a terrible development.
Again, it's relative, because McDonald's still serves tens of millions of people a day. But if the number of diners consistently declines, price increases become the mechanism it has to rely on for growth. And higher prices likely mean fewer guests, again, because that makes already more-expensive competitors appear as stronger options. It has to reverse this drop.
Too much change. Executives have committed to concentrating on the main sandwich and side items, while backing away from the promotions that last year complicated the grill and undoubtedly slowed decision times for customers. New kitchen equipment is being implemented that's meant to allow for more customization and improve preparation times. Remodels are continuing. All that's great.
But it doesn't happen for free, and it doesn't always happen quickly. And it's another trouble spot for franchisees, who want fast and substantial monetary returns on the funds they have to invest. Is the corporate office getting it right?
Related to this are health concerns. Can McDonald's keep the core customer, as well as bring in a new audience, with a multifaceted story? No one perceives McDonald's as health food. The company, in response, has pressed salads and sides including apple slices, saying it will provide better choices for non-burger-eaters.
Making such menu changes hasn't had much of an effect on sales, though it has at times made it appear McDonald's was transitioning from a sandwich-and-fries seller to the neighborhood diner with 1,000 items. For restaurant operators, this greatly affects purchasing, storage, training and prep. Diners, meanwhile, can't settle on what to get. Of course McDonald's has made changes since the 1950s, but what got it where it is? And what will guide it for the next 50-plus years?
Millennials. McDonald's has struggled here. Restaurants and retailers see them as the demographic whose loyalty they must secure now. Generation Y is regularly said to be concerned with topics such as farming practices and food quality, as opposed to finding the cheapest burger in town. McDonald's, worried about Subway's appeal to this group, last year launched chicken wraps.
These guests may also tend to favor restaurants that voluntarily pay higher wages to employees. Some locales are already requiring minimum pay above the $7.25 federal law, and in those markets, McDonald's already has to pay more for labor or reduce hiring. But at stores elsewhere, operators will be very reluctant to do so. How does the company convince Gen Y that it shares its values, without hurting the business itself?
But the truth is that, even if all these issues are resolved, it's just a matter of time until the next battle begins. For McDonald's, it will never be easy to get it all right.
- Consumer Discretionary