Can McDonald's Keep Delivering in the Long Run?

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Dec 18, 2014
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McDonald's, (MCD, Financial) the largest fast food chain across the globe, with its foothold in over 120 countries, is growing at a steady pace and is providing stable returns to its investors. Let’s delve a little deeper into the company to find out what it has in store for investors going forward.

Always trying to keep it conveniently valuable

McDonald has not changed much in its 60 years in business, be it 1948 or 2012, the company’s low cost model has always been its charm. Moreover, with the launch of its dollar menu in 2002, it further gained recognition. The company’s main focus has been delivering value to its customers keeping in view the fact that it has only increased its prices by 2%, while the sector is experiencing an inflation of 2.5%. The company is all set to launch the “Fish McBites," as a limited-time addition in February. The Fish McBites, which are expected to boost the sales, will be launched in three sizes and will use Alaskan Pollock in its preparation.

Apart from value, another main focus of McDonald’s has been consumer convenience. The company’s drive-thru restaurants and extended hours of service have improved its image, of being a convenient food destination. The company looks to invest $3.2 billion in 2013 to open new restaurants, and improve its global image of being a convenient fast food chain. McDonald’s management has reaffirmed its resolve to open 2000 restaurants in China. This I feel is a confident step to reimage itself after it was reported to be selling expired chicken in China.

How well are its competitors placed?

McDonald’s faces a strong competition from Yum! Brands, (YUM, Financial) the owner of KFC and Taco Bell. The revenue of Yum! has reduced a little, as its sales took a hit, because of the Chinese Government’s recent public concerns over chicken antibiotics of KFC not meeting prescribed standards. I strongly feel the company will come out of this trouble in China soon. Yum! is a very big brand in China and with the rebound in Chinese economy the company will be better placed than other fast food chains with its 4000 KFC restaurants and 700 Pizza Huts? Yum! is also making good capital investment and opening new restaurants outside U.S.A. It has opened over 1300 restaurants in the last two years and has a plan of spending $1 billion this year. Taco Bell’s value meal’s competition with McDonald’s value meals has pushed McDonald’s to lower its margins, affecting its profits.

Food inflation is no doubt affecting the entire industry but Chipotle NYSE: CMG) seems to be better placed than others in combating it. The company has a loyal set of customers and as the food is priced comparatively higher than its competitors, it can pass on the increased cost to them with ease. Chipotle is also moving into catering service which shall start in all of its outlets in 2013, which will further open new avenues and sources of revenue for the company. The trend of dining at fast casual places rather than traditional restaurants will help Chipotle further in its growth prospects. The company, I feel, is taking the best from all its peers and making it more competitive to provide tremendous returns in the future.

Conclusion

All the companies in this article have a story of their own and all seem to be worth reading. McDonald’s is a mature company, with over 62 million daily customers, which should provide stability to an investor’s portfolio. Yum! Brand no doubt is in some trouble, which I feel will be short-lived and the company will be back delivering strong results. The company is well placed with over 4000 restaurants in China, the second largest growing economy. Chipotle seems to be a bet in the future. With its strategies well placed, it is the only company that can capitalize on any change that comes in the fast food industry. Now it’s entirely up to an investor what he wants to bet on.