McDonald’s (MCD, Financial) recently reported its November sales performance across the globe. The fast food giant has seen its worst sales decline in a decade in the U.S. Increasing competition from emerging fast-casual chains that have been eating a greater pie of the market is adversely impacting its sales. While other markets have been good, McDonald’s needs to fix things right in the domestic market which makes for the biggest volumes. Let’s assess the fast food behemoth’s monthly performance and dig out the key challenge.
Numbers in a snapshot
McDonald’s witnessed a sales drop of 4.6% in November compared with analyst estimate of 1.9% fall 4.6% in the US market which was steeper than analyst expectation of 1.9%. The company’s comparable store sales for the month of November plunged 2.2% globally. The company’s domestic market has been the biggest pain driving sales. Altering preferences of the American population is taking a toll on McDonald’s sales.
McDonald’s sales tumbled in the U.S. due to growing competition from other players, particularly those that deal in organic food item. In 2014 so far, McDonald’s U.S. sales have declined 2.3% year on year. The company also witnessed setbacks in Europe and Asia. McDonald’s failure in Europe is attributable to the European debt crises that began in 2009. The European market consumer spending has curbed drastically as consumer confidence has nosedived.
On the other hand China is another market where McDonald’s facing supply chain challenges which had a bearing on its third quarter profits. Falling sales in this emerging market is attributable to the supplier scandals revealing usage of inappropriate chicken by McDonald’s. This has had a drastic impact on the company as consumers are restraining from dropping in the fast food outlet, thus impacting the footfall and sales. Yum! Brands (YUM, Financial) is in a similar soup. Owing to a much wider presence in China, the chicken scandal has negatively affected Yum!’s sales much more than McDonald’s.
But all isn’t as bad as meets the eye. McDonald’s displayed some good show in other markets. McDonald’s Australian operations have been quite good, which is a positive sign. Other countries that include Latin America and Canada have shown generous results. However, its volumes in these markets are much smaller than in the domestic market. So the improvements in these regions weren’t enough to offset the dull business in US. What is the reason for McDonald’s poor run in the US market?
Increasing competition from the likes of Chipotle
Americans are gradually becoming health conscious and are therefore avoiding calorie rich preparations such as burgers and fries. Fast casual chains such as Chipotle (CMG, Financial) is increasingly becoming a formidable competitor for fast food chains. Chipotle provides healthy and organic food which is becoming a preferable choice of consumers who are looking for healthier food options. Further, Chipotle has been able to minimize customer wait times, while providing better service. This is a big plus for the company particularly when compared with McDonald’s where consumers get tired waiting in long queues.
McDonald’s burgers, Picture from McDonald’s
It’s not done here. The huge menu offered by McDonald’s more often than not confuse customers than delighting them. And McDonald’s is not been able to fix this major problem. In contrast, Chipotle claims that they do not need tons of items in their menu list to attract more customers. It has rather stuck to the same menu ever since it was opened. In an interview with Business Insider, Brian Sozzi of Belus Capital Advisors said that McDonald’s working to lessen the wait time by reducing the menu a bit. Despite cutting on the menu, it’s too overloaded with items that are making operations messy.
The takeaway
There are two things McDonald’s needs to do. First, introducing healthier items and trim down on the unnecessary cumbersome menu list. And second, make the operations smoother. If the fast food chain handles the first one properly, the second will automatically be taken care of. It might take some time for the company to support this transition. But there’s no other way out apart from changing with evolving preferences over time. If McDonald’s wants to revive its declining numbers, it has to provide what customers want – something that’s higher on nutrition and quality. With more than 14,200 outlets in the U.S., McDonald’s definitely has what it takes to support this transition.
