Here's McDonald's main worry, in one chart
The biggest problem facing McDonald's (MCD), the one at the center of it all, is the fact that fewer customers are buying its Big Macs and other burgers.
As discussed in an article last fall, what was likely to happen now has been confirmed: The chart above shows that McDonald's transaction counts, down in 2013, dropped again in 2014. These two consecutive decreases stand out because from 2003 through 2012, guest traffic had increased each year at the Golden Arches.
The company does have $90 billion in annual system sales, so it's fine to say it's not a major worry yet. And important to note is that many large chains have seen their traffic flatten or fall in recent years. But it is a concern, and it's the key issue McDonald's has to reverse if the stock and restaurant sales are to get back to the growth rates investors had gotten used to. Whether it's a matter of competitors being chosen instead, diners opting for healthier options or eating at home, boredom with the brand or the view that it's no longer a good value, McDonald's guest numbers are in decline.
Last year, traffic had a serious setback in the Asia-Pacific, Middle East and Africa region, which lost customers because of negative supplier news in China. However, transactions were down in all major regions. In Europe, they've declined three years in a row. In the U.S. and APMEA, it's been two years.
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The good news for McDonald's is the burger chain still has millions of visitors -- being everywhere has its advantages. The bad news is it's relying on those people spending more to keep same-store sales from being even worse. (Same-store sales, an important retail measure, reflect both the amount spent and the number of customers actually spending.) In 2014, same-store sales fell 1%, the first annual decline since 2002. Requiring more money per customer isn't unusual, considering inflation is what it is, and it certainly happens in retail. The challenge for McDonald's is that the regular customer is used to low prices, like those at Taco Bell. If the prices start approaching Chipotle (CMG), of which McDonald's formerly owned a majority stake, one wonders how well that's going to work.
It's not accurate to say "no one goes to McDonald's anymore." But the company did have growth in key comparable-sales indicators for a solid decade. Now it doesn't. That's why McDonald's has tried one endeavor after another to get patrons in its stores -- technology with ordering, customization with sandwiches, more items on the menu, then fewer items on the menu, new ads, new social media efforts, store redesigns and so on. The last couple of years, it hasn't worked. With a company this size, change isn't simple, as noted in Barron's.
After reporting its full-year earnings on Friday, McDonald's said its capital budget was starting around $2 billion for this year, the lowest level planned in more than half a decade. Though that will still mean a few hundred stores will be added to 36,000 it has open worldwide, it might not be the worst idea to focus on making things right with what it already has.
