McDonald's Can No Longer Thrive on Just Burgers And Fries

By Jonathan Berr | Updated September 02, 2014 AAA

Picking what to eat at McDonald’s (NYSE:MCD) is often a stroll down memory lane. Top sellers such as the Big Mac, Quarter Pounder and Filet-o-Fish all date from the burger chain’s heyday in the 1960s and 1970s. The McRib, another classic fan-favorite that's notably released only periodically throughout the year, debuted back in 1981, while the McCafe began in 1993.

Other menu items the Oakbrook, Ill., company has tried, including the Angus Third Pounder, the Premium McWrap sandwiches and most recently, the Mighty Wings, have failed to whet consumers’ appetite. 

The company, which for most of its history has been considered an innovator in the fast food industry, is now largely a follower while smaller rivals have picked up the slack. Wendy’s (Nasdaq:WEN), which had struggled for years, recently scored with the Pretzel Bacon Cheeseburger.  Yum Brands’ (NYSE:YUM) Doritos Locos Tacos netted $1 billion in sales. Burger King, which has long played second fiddle to McDonald’s, threw down the gauntlet last year when it introduced Satisfries. Not only did the lower calorie French fries help boost sales, but they also bolstered the chain’s reputation among health-conscious consumers.

Under CEO Don Thompson, the House that Ronald built has been trying to get back on track and largely failing.  Same-store sales, a key retail metric measuring the performance at stores open for at least a year,  fell in January for a third straight month. They dropped 0.3% in February and 1.4 % in the U.S. alone, which was worse than analysts expected. 

While the chain blamed the cold winter weather for its woes with some justification, its problems go deeper. Consumers these days, especially Millennials, just don’t like McDonald’s. Goldman Sachs found they prefer Starbucks (Nasdaq:SBUX) by a wide margin, giving it a brand equity of 73; that's ten points higher than McDonald’s. Even when compared with other burger joints, McDonald’s is found lacking by consumers who prefer the taste of Wendy’s and to a lesser extent, Burger King.  A 2013 survey by restaurant consulting firm Technomic found that almost 51% of consumers rated Wendy’s "excellent" in terms of food quality, about 44% had that opinion of Burger King and some 37% felt that way about McDonald’s.

 It isn’t just consumers who are upset with McDonald’s; franchisees are unhappy too. Reports in Bloomberg News and elsewhere have noted they are miffed about rising costs and falling profits. A bloated menu chock full of items that few customers actually want is resulting in drive-throughs that are the slowest in the industry. Franchisees are also griping with some justification that the costs of running a McDonald’s are far higher than those of competitors. Customer service has become so bad that one executive called it “broken” and the Wall Street Journal noted that complaints about rude employees have soared.

These challenges are weighing on McDonald’s shares, which have barely budged over the past year. Though analysts note the stock is cheap with a price-to-earnings multiple of about 17, making it a bargain compared with Burger King’s 42 and Wendy’s 80, it’s hard to recommend an investment in the Home of the Golden Arches.

McDonald’s, though, seems to be trying to learn from its competitors. Newly designed play areas are similar to those found in Chick-fil-A, and the chain could learn a lot from the closely held Georgia company. People camped out ahead of a new Chick-fil-A opening in New Jersey because the first 100 customers earned free chicken sandwiches for a year. It’s a genius promotion that Chick-fil-A has done for years. 

When was the last time the public got this excited about anything new McDonald’s has done? The chain is also experimenting with having customers custom order their burgers. But isn't this a little late? Wawa, a closely-held convenience store chain, has allowed customers to order customized sandwiches over computers for years. 

Speaking to Wall Street analysts on the company’s earnings conference call in January, Thompson spoke of the need to “re-establish the trust of customers…That means basic execution at a restaurant level, marketing engagement at a much stronger level and also to make sure that our menu is relevant."

Of course, that’s easier said than done.

 

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.

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