McDonald’s Corporation: The Year In Review

by Trefis Team
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MCD
McDonald's
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The past year has been a rather difficult one for McDonald’s Corporation (NYSE:MCD), marked by poor revenue growth and declining margins. The decline in margins can mostly be explained by a sales mix increasingly geared towards the low margin ‘dollar menu’. But the company’s poor top-line performance can’t be explained by any one such factor alone.

We have a $97 price estimate for McDonald’s, in line with the current market price.

The company’s management would like to blame the weak sales figures on poor macroeconomic conditions. Poor economic conditions certainly have played their part. Nearly 10% of the company’s franchisee stores are located in Japan, and a sharp devaluation of the yen has significantly hampered its dollar flow. But the macroeconomic argument can’t really paint the entire picture in its domestic markets, especially in the light of decent performances by direct competitors such as Burger King and Wendy’s. Sample the numbers: McDonald’s US same-store sales grew by 0.7% in Q3 2013, while the same figure for Wendy’s stood at over 3%. [1] Through November, McDonald’s same-store sales growth in the U.S. remains flat at 0.1%.

Comparable sales, or same-store sales, is an important measure to gauge a restaurant’s performance since it only includes the restaurants open for more than a year and excludes the effect of currency fluctuation.

McDonald’s low sales growth figures in the first half of the year were understandable since the company faced a difficult comparison over the previous year figures, when its sales were unusually good due to a warmer winter. The figures should have improved in the second half of the year but they haven’t done so. This is a major cause for concern.

To add to management’s woes, the past couple of years have also seen the emergence of the ‘fast casual’ segment in the world of fast food, with players such as Chipotle giving customers a chance to trade up on food quality at a premium price. Their emphasis on a mix of ‘organic, ethically-sourced’ food and more luxurious interiors certainly seems to be working its charm on the American consumer. Chipotle’s same-store sales (most of which are in the U.S.) were up 6.2% in the latest quarter. In the quarter preceding that, it was 5.5%. [2]

Under Performing In The U.S.

Clearly, McDonald’s is under performing compared to its rivals in the U.S. But why is this happening?

The answer might simply be the lack of any focused and aggressive strategy, even as the arena gets more crowded. For example, Wendy’s has been focusing on an “Image Activation” plan, with emphasis on more modern restaurant designs. Similarly, Dunkin’ Donuts has been trying to generate a greater proportion of sales in the afternoon segment through the introduction of new menu items and improving the overall decor of its restaurants. The players in the fast casual segment have also been chipping away with McDonald’s customer base with a more subtle positioning, presenting a ‘high-end experience with quick service’ that both regular eaters of fast food and more fancy diners can relate to.

Some of the more direct competitors, however, have been less than subtle. Burger King, for example, has launched what is clearly a swipe at the Big Mac, with a very similar name – Big King. [3]

Things To Improve In 2014?

On its part, McDonald’s has also been trying to diversify its menu, introducing items such as ‘Mighty Wings’ and testing its ‘Dollar Menu and More’, which is basically an upgraded version of the ‘Dollar Menu’. This has done very little so far – the latest numbers for same-store sales growth stand at 0.2% in October and actually declined by 0.8% in November. [4] However, once the menu hits the stores across the entire country, there could be some upside to these figures.

There are also reports that McDonald’s is in the process of simplifying its menu. The current menu is too big, which results in long queues especially at drive-thrus. With these changes incorporated, the year 2014 could throw in some surprises for the world’s largest fastfood chain.

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Notes:
  1. MCD 10-Q []
  2. CMG Investor Relations []
  3. Burger King Introduces Big King to Taunt McDonald’s and Stagnating Overall Sale, November 6, 2013, thedailybeast.com []
  4. McDonald’s U.S. November Same-Store Sales Trail Estimates, December 10, 2013, bloomberg.com []
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