McDonald's (MCD) guests are disappearing. Not all at once obviously, but it is undeniably happening. And that is the core problem McDonald's has to solve.
The numbers make it clear that the consistent growth in the number of transactions at McDonald's stores, a regular occurrence for years, is no more. The first chart below goes back to 2009, but for half a decade prior to that, McDonald's recorded positive changes in year-over-year traffic numbers. That ended in 2013, when guest counts fell 1.9%. At each interval this year -- the end of the first quarter, the halfway point and after nine months -- the decline has continued.
Comparable guest counts factor in all restaurants, whether owned by the company or by franchisees. The latter are the majority of the McDonald's system.
There are many reasons to point to. For some diners, it's pricing, as the Oak Brook, Ill., company has lifted prices over time, again and again. Inflation happens, yet one of McDonald's key drivers is affordability. As a recent Bloomberg article detailed, there's no doubt wallet concerns are sending some consumers elsewhere.
Heightened competition, whether from similar chains or the fast-casual restaurants, is another factor. The constant coverage around obesity and the "healthfulness" of fast food has a role. Global incidents have an impact: In China, a supply scandal over the summer hurt Asian results and probably will for a few more months.
Multiple issues are involved, but the concern is that most of them won't be going away very soon. Same-store sales, which measure the transactions being conducted, as well as the amount of money spent during visits to stores at least 13 months old, have suffered tremendously amid the traffic drop. From 2009 through 2012, all was well, as the red measurements added to the second chart, alongside guest counts, indicate. The last two years, in contrast, have been dreadful.
Were it not for higher prices being paid at the counter, comparable sales wouldn't even be at this level. The green lines added to the third chart, with transaction counts and same-store sales, illustrate this. These lines represent the implied increase in the average check at each interval back to 2009, based on same-store sales and the change in the number of transactions detailed by McDonald's. While these findings aren't official, they do provide a guide of how reliant on pricing McDonald's has gotten to keep comp-store revenue at least flat.
Average check is determined from price changes for the same items over time and customers choosing costlier menu items, though McDonald's notes that, generally, "pricing has a greater impact on average check than product mix."
McDonald's obviously has been able to raise prices and count on consumers to pay more before. But it may be that, in the last two years, its customers indeed have reached the ceiling of what they're willing to spend at the Golden Arches.
To get diners back, McDonald's has tried new items, such as a McMuffin with egg whites, and limited-time offerings, including chicken wings. The menu got too complicated, so now the company is promising to simplify it and allow for a more local approach to what's being sold. It's working on kitchen changes, re-emphasizing breakfast and remodeling stores. It's building up on the technology side to make ordering more efficient. It's launched a social media food-transparency campaign. Recent leadership changes have brought back veterans from the past decade, when sales were on the upswing and the stock price soared. (The Wall Street Journal describes what McDonald's is now planning to change.)
So far, patrons have been indifferent. Investors, though, haven't given up yet, not with the market credibility McDonald's has accumulated over the years, not with its real estate, its cash flow and its dividend. McDonald's still has millions of guests, a remarkable brand and massive sales, at almost $90 billion a year. But at some point, the shrinking number of transactions has to be reversed, because McDonald's can't plan on never-ending increases at the counter to keep sales up.
Newly described digital-local efforts might work. Or they might not. Technology and customization are major themes in the industry, and McDonald's doesn't want to sit on the outside while everyone else is going 21st century. However, it's difficult to fathom that McDonald's traffic problems are the result of not having proper apps or appropriate customization. That may be part of it, but only part. Larger forces are at work.
Weak comp numbers one year make it easier to demonstrate a turnaround the following year, but as 2014 for McDonald's shows, it's no guarantee. If traffic turns positive next year, management can tell the board, shareholders and analysts that the plan is working, even though the truer comparisons will be 2016 and beyond. Although if guest counts continue to fall, what then, and how patient will McDonald's managers, investors and franchise owners be?
McDonald's can stay big. That's not being debated here. But to return to growth, lines need to form, too. That means food people want, at a price they want to pay, quickly and accurately prepared. At times, those 35,000 restaurants may be as much of a curse as a blessing.