For McDonald's (MCD), 2014 may well end up as one of the most pivotal in its nearly 60-year history: Either it succeeds in powering past its recent setbacks, or it becomes further viewed as a faltering giant in retreat.
McDonald's, to be clear, isn't going anywhere anytime soon. It's too large and entrenched, with $89 billion in system-wide sales and 35,000 locations globally, to suffer serious damage quickly. In the U.S. alone, its 14,000-plus units, the majority of them franchises, had sales in excess of $35 billion last year. Should its demise ever come, it will be in a far distant future.
But cracks in the structure are there. McDonald's has mended them before, as with ongoing restaurant remodels meant to improve the perception of stores by offering fresh looks and cleanliness. Its menu additions, both the permanent and limited-time offers, regularly nod to changing consumer interests. Even after the "Super Size Me" era, it thrived.
Now, however, McDonald's has a new set of challenges to overcome. Exactly how it does so in the months ahead could say a great deal about its success, or lack of it, for years.
CEO Don Thompson and other McDonald's executives know this. They're not deaf to trends, sometimes to their detriment. The Oak Brook, Ill., company has already said growth won't come easily this year, but it's taking steps that, when combined, could ease some of its impediments.
For instance, on the food side it's added wraps to the menu. It's rolled out egg whites at breakfast. It's looked at expanding breakfast hours to fight off Burger King (BKW), Dunkin' Donuts and now Yum Brands-owned Taco Bell (YUM). It's continued to lean on its McCafe for growth and promised to provide a greater number of healthier items. "Health" hasn't been met with much success, though McDonald's has little choice but to keep it up, if only to protect itself from critics of its typical high-calorie fare.
At the same time, even as it's working to address changing tastes, McDonald's has acknowledged the menu became too complex last year; keeping ordering and operations manageable will be critical, as will updated preparation stations designed to improve speed in the kitchen. Also, it's hired a new marketing chief, Deborah Wahl, who will be given the chance to reshape McDonald's ever-important messaging.
Investors might be buying into the next chapter as this year unfolds. From early 2007 to the first months of 2012, McDonald's was the best stock in the Dow Jones Industrial Average. But then it teetered, and it ended 2012 with a loss. Last year it rose only 10%, lagging the 54% gain in restaurants tracked by Yahoo Finance, as well as the advance in Burger King, Wendy's (WEN), Jack in the Box (JACK) and Sonic (SONC). Although McDonald's trails the S&P 500 over the past one-year, two-year and five-year spans, it's leading the market so far this year, with a gain of 3.9% compared with the S&P's 0.3% decline.
That could also be a sign that traders, showing skittishness about stocks, see considerable appeal in names like McDonald's, which draw conservative shareholders with their dividends and better ability to hold up against economic downturns.
Wall Street will get a better sense of how things are developing on April 22, when McDonald's reports its first-quarter earnings. The world's biggest restaurant chain measured by sales is expected to earn $1.24 a share on revenue of $6.71 billion, and same-store sales should edge up 0.2% from last year. Same-store sales is an important metric because it represents the combined change in the number of visitors and the average price those diners pay, along with whether they're opting for more-expensive menu items.
In January and February, same-store sales fell in the U.S., in part, the company said, because winter weather kept patrons home. That's undoubtedly true. But also true is that, for a year and a half, same-store sales have been inconsistent, with multiple negative months. It hadn't seen such an event in years before late 2012. McDonald's took this so seriously that then-U.S. president Jan Fields, who was with the company more than 35 years, was replaced by Jeff Stratton.
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Certainly, it wasn't all Fields' fault, and anyone who may have believed it was can't think the same today. The clearest sign of trouble came when something truly notable happened in 2013 — the number of people going to McDonald's stores fell 1.9%, breaking a run of at least nine years of increases. That's a function of the world's economies, of growing competition, of changing dietary goals, of many things. Regardless, it boils down to this — they voted with their feet.
That gets at the core of McDonald's problems. At the same time it's seen falling traffic, higher-priced items haven't always resonated, as evidenced by the recent discount on the Mighty Wings promotion. Then there are menu prices overall, which last year were up 3.1% in the U.S., outpacing the broader industry. McDonald's has reworked the old dollar menu to add more-expensive items, and it hopes customers will still view these within the "value" framework. But the McDonald's customer will not keep coming back if inflation at the House of Ronald surpasses the alternatives year after year. Simply stated, they want cheap, fast and consistent food.
Fast food is big. Last year the National Restaurant Association predicted $188 billion in U.S. sales for the sector, and McDonald's is a giant part of that. To an extent, its "trouble" is relative. It has and will continue to have incredible reach. It has the brand and investment power unmatched by competitors. But it also has a good deal to repair, and it has to do so amid never-ending criticism — including activists who want it to raise wages and give better financial guidance to workers — and constantly evolving tastes.
Shouldn't be a problem, right?