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Is McDonald’s Up to the Challenge?

April 03, 2014 | About:
Arrow Analysis

Arrow Analysis

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It may have been a happy new year for companies globally, but the start of this year has not been great for McDonald’s (MCD), reports suggest. In a move that left industrialists shocked, the company offered "free coffee" along with its breakfast menu from March 31 to April 13. The freebie, typically a last resort, which comes after disappointing sales figures, has put investors on edge.

McDonald’s Current Position

One of the world’s largest food retail chains, McDonald’s serves over 70 million customers worldwide. But recently that number has been on the decline. With competition becoming tougher every moment, the fast food giant showed disappointing fourth quarterly earnings.

Global shares declined by 0.1%, a stark departure from the 0.5% gain predicted. Although the company blames the unusually cold winter for declining sales, reports suggest that frost bite may not have been all that’s keeping the food giant on thin ice.

Globally, McDonald’s hold is faltering. The company recently lost its position as the most beloved fast food chain to Japan’s own MOS Burger, thus losing a significant position on the Asian market. The rising food prices in the US, too, hinder McDonald’s growth. With sharp rise in prices of beef, veal and poultry, the profit line in the main food items diminishes significantly.

What Does the Company Plan to do?

To combat the multiple problems, McDonald's decided to focus on its breakfast department. Breakfast covers about 25% of the industry’s turnover, amounting to nearly $50 million. From a purely theoretical standpoint, it is a smart move. But here too, it faces strong opposition from rivals like Starbucks (SBUX) and Yum! Brands (YUM) Taco Bell.

Unlike McDonald’s these two companies show a steady rise in profits, with Starbucks reporting an 11.1% gain in Japan. Taco Bell, on the other hand, came up with a tongue-in-cheek advertisement video directly challenging the company. For those still in the dark, the video depicts dozens of men named Ronald McDonald gushing over Taco Bell’s breakfast line. Unlike McDonald’s tradition menu, Taco bell’s breakfast includes unique items like "Cinnabon Delights" and "Waffle Tacos." The freebie, it seems, was a response to this latest attack.

The Market Picture

In the last decade or so, the U.S. market has become nearly saturated with fast food brands, making completion stiff. Companies like Taco Bell, Starbucks, Chipotle Mexican Grill (CMG) and Burger King (BKW) are all fighting to get a piece of the proverbial pie. That, coupled with the recent rise in health awareness, makes it is no wonder that McDonald’s position is precarious.

But this in no way signifies the beginning of the end. Markets in developing countries are still wide and open and the US retailer is taking full advantage of it. The company recently opened its first outlet in Ho Chi Minh City, Vietnam and is planning to open several more in Africa. Africa, as the fastest growing country, provides enormous expansion possibilities. Since 1999, McDonald’s has enjoyed an 8.2% expansion rate and income per capita has grown nearly 5.5 times. Chinese and Indian markets, too, are growing profitably.

Parting Words

McDonald’s has its fair share of problems, it’s true. Unpredictable weather, saturated markets and managerial missteps have dealt a significant blow to its top line and profits, but, in my opinion, the iconic brand will persevere. In the last decade, the company has steadily, but surely, increased its dividend each year. And this temporary bad weather shall pass too.


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