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McDonald's has one supersized challenge to overcome in America

Brian Sozzi
Editor-at-Large

McDonald’s will need more than extra crispy bacon on its burgers and legendary french fries if it wants to solve its biggest challenge in the U.S. right now.

That is overcoming weak traffic to its Golden Arches restaurants. McDonald’s comparable guest counts in the U.S. — which measures the number of transactions at all restaurants — fell 2.2% in 2018. As a result, McDonald’s U.S. same-store sales growth slowed in each quarter of 2018 despite successfully pushing through menu price increases and new delivery capabilities.

McDonald’s shares under-performed the major indices for a good portion of 2018. The stock only began to turn higher in the fall amid a rotation into more defensive stocks during a bout of heightened market volatility.

What happened, Ronald?

Analysts mostly blame an ineffective $1, $2, $3 value promotion implemented last year for the traffic troubles. Another culprit is believed to be minimal new menu innovation to get folks excited about visiting the restaurants.

“We believe that breakfast softness and pressure from D123 (value menu) were somewhat intertwined last year, as McDonald’s moved away from its prior 2 for $3 bundles and chose to let the customer self-bundle using the D123 menu —ultimately, in our view, leading to less of a ‘call to action’ in the morning day part and particular softness in breakfast sandwich-friendly markets, such as the South,” long-time restaurant analyst Will Slabaugh at Stephens said. “Competitors also seized on this opportunity (primarily Burger King) to offer their own 2 for $3 and other discounted breakfast deals to steal traffic share.”

McDonald’s CEO Steve Easterbrook is well aware that if same-store sales are to accelerate in 2019, reigniting traffic will be key. “We're doing well with average check growth but we really want the customer comes back and more often,” Easterbrook told Wall Street analysts on a January 30 conference call.

The performance is especially lackluster considering McDonald’s continues to aggressively remodel the interior and exterior of its restaurants to make them look more modern. Interiors, for example, have been outfitted with giant touchscreens that allow diners to create their own meals and get out quicker. The interior has also received warmer paint schemes and more comfortable seating to keep people inside longer.

Mickey D’s is smack in the middle of a plan to spend $6 billion by 2020 modernizing its 14,000-plus U.S. locations. To drive a healthy return on that investment, growing traffic is vital.

New promotions

McDonald’s is leading with new products (for a change) in the first quarter to reverse its traffic trends. The company debuted a new bacon promotion in January that received a fair amount of buzz. Meanwhile, the company has unveiled new breakfast sandwiches with more meat.

The Golden Arches has also put more power back into the hands of franchisees to craft some of their own promotions to stay competitive with the likes of Burger King and Wendy’s.

“We believe that a much-improving breakfast business is helping same-store sales growth to accelerate in 1Q, likely leading the system to post comps of 4%+ for the first month of the year,” said Slabaugh. “We believe this new-found strength at breakfast has much to do with lapping over the D123 introduction of 2018, which saw breakfast sales slow fairly meaningfully as the promotional language of the company changed.”

It’s all about that bacon, or so McDonald’s hopes.

Brian Sozzi is an editor-at-large at Yahoo Finance. Follow him on Twitter @BrianSozzi

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