The economy still remains a key issue and the restaurant industry is experiencing slow growth. More and more consumers are planning to dine out less in the coming days. Fast food still remains a hit amongst the young population. A change in lifestyle trends and urbanization are contributing to it. Because of relative cost advantages, fast food industry is growing faster.
McDonald's Corp. (NYSE:MCD) franchises and operates McDonald's fast food restaurants in the food service industry, boasting 34,923 restaurants in 119 countries. It is facing some headwinds because people’s sentiments have changed regarding dining out and as a result it has faced soft growth over the recent years.
Going By the Figures
McDonald’s continues to struggle. If the first quarter results have revealed anything, it was that revenue challenges continue and large western markets are saturated. McDonald's has the highest dividend yield in the peer group: 3.26%. On first glance, the yield is attractive. With a struggling top and bottom line, however, I think McDonald's is not that great an investment and surely shouldn't be bought solely for its dividend yield.
McDonald's has been quite volatile over the course of the last twelve months, trading between $92 and $103. The restaurant franchise has delivered a negative return of only 0.44% for shareholders over the last twelve months.
While McDonald’s performance in the last quarter could be skewed by bad weather, the company’s problem is much more serious than one that can be solved by better weather or free cups of coffee—as the company has been doing lately.
McDonald’s problem is growing competition and saturation in its domestic and overseas markets.
So what is Dragging It Down?-Root of the Problems
Weak demand- It is true that the U.S. economy is bouncing back, and the stock remains frisky. Upper-income Americans are spending like crazy on televisions, luggage, jewelry and watches. But most people are finding the recovery tougher going. The middle class face a tough job market and higher payroll taxes, while cuts in food stamps and other assistance programs have hit the poor hard.
Such financial hardships affect McDonald's patrons, limiting the company's ability to adjust its business to drive growth.
Stronger competition- McDonald's has the McRib, but then Burger King (NYSE:BKW) started selling a new barbecue rib sandwich for $1 last fall. Wendy's (NASDAQ:WEN) is selling spicy chipotle burgers and chicken sandwiches for about the same price. McDonald's doesn't have anything like that on its new "Dollar Menu & More" offering.
Wendy's, in particular, is making a run for the high-end customer with premium items such as the Pretzel Bacon Cheeseburger, one of its most popular limited promotions in years, and the brioche bun.
In Japan, for instance, McDonald’s is facing strong competition from Mos Burger, in China by Kentucky Fried Kitchen (KFC), Pizza Hut, and local start-ups. Even in the tiny Greek market, McDonald’s is no match for local upstart Goody’s.
Poor management- It made a major mistake in the form of Mighty Wings- surprisingly spicy chicken wings priced at $1 each. Needless to say, they didn't go over well with some customers. Sales were reportedly 20 percent below expectations, and McDonald's was left with 10 million pounds of wings in frozen storage.
Franchisees are also struggling with all the new items on the menu, which end up slowing down service across the board. In a survey last year of 25 McDonald's franchisees, some said the restaurants had become an "operational nightmare. New, pricey products such as the McWrap took too long to make, the owners said.
McDonald’s, the world’s biggest restaurant chain, has had a tough time of it lately. Some of its U.S. workers, and plenty of others, have been criticizing its low wages. Franchisees, who operate almost 90 percent of the more than 14,100 locations in the U.S., have been frustrated with the expanding menu and constant promotions. Customers have complained of slow service.
McDonald’s is hardly the first place that comes to mind when thinking of a low-calorie-low-cholesterol menu. The McDonald’s name, which once was an asset in the baby-boomer market, has turned into a liability.
McDonald’s is a great American brand. For years the company has delivered superior consumer value, enhancing shareholder wealth in the process. McDonald’s has further demonstrated a remarkable ability to expand the scale and scope of its operations and adapt to changing consumer demands.
The trouble is, however, that the company’s growth seems to be ebbing, as evidenced by a string of weak sales and earnings results.
Part of the problem is certainly a weak global economy, especially in Europe. But that’s a small challenge, as the global economy will eventually pick steam. The bigger challenge is growing competition and saturation in McDonald’s market — the highly globalized segment of the world economy, markets where consumers have uniform preferences.
McDonald’s scale advantage associated with a standardized menu with little localization has fared really well so far, as it caters to the highly globalized segment of the world market. But as this market becomes crowded and saturated, McDonald’s must reach for the two other segments of the world economy, which will require a more localized menu that may erode its scale advantage, pitting it against local competitors at the same time.