We Can Save McDonald's by Killing Grimace

Grimace may be one of the endearing McDonaldland characters, but too many grimacing employees at McDonald's (NYSE: MCD  ) may also be the undoing of the world's largest restaurant operator.

Mickey D's posted uninspiring quarterly results on Friday. Earnings fell short of Wall Street expectations for the third consecutive quarter. Comps were negative. Revenue, operating income, and profitability were essentially flat.

The first three months of the year haven't been great for chains in general. Even market darling Chipotle Mexican Grill (NYSE: CMG  ) clocked in with a surprisingly mortal 1% increase in same-store sales. Yes, comps at the ballyhooed burrito roller failed to keep up with inflation.

There's an argument to be made that restaurant operators are struggling since payroll tax rates moved higher in January after a two-year break, but Mickey D's saw its comps turn negative in October of last year, months before paychecks got slightly smaller.

But let's get back to that first point. Before the stock tumbled late last year, monthly comps had been consistently positive since 2003, and there's a reason to believe that surly hires may be at the root of the problem.

The Wall Street Journal recently reported that executives are concerned about a growing number of customer complaints. McDonald's reportedly alerted franchisees during a webcast last month that the number of gripes calling out rude or unprofessional employees is increasing.

I argued that the chain's expanding menu could be the culprit, suggesting that fancy beverages and exotic menu variations could be confusing customers, slowing down service, and resulting in more messed-up orders.

Unhappy customers probably wouldn't be such a big deal if business was booming, but clearly there's a problem if global revenue climbed a mere 1% and operating income fell 1% in Friday's quarterly report.

Tastes change, and McDonald's may have thrived with positive comps during the recession simply because it was a reliably cheap place to eat. Now that the economy's improving to the point where patrons are trading up from the Mickey D's drive-through, the fast-food behemoth may be trying too hard to woo customers with mango pineapple smoothies and frappe mochas.

There's nothing wrong with premium beverages, and investors will see that when Starbucks (NASDAQ: SBUX  ) reports on Thursday. Analysts see the baron of baristas posting double-digit growth on the top and bottom lines. However, McDonald's may not realize that in trying to be a jack of all trades, it's losing sight of the basics that made it a global leader.

Does anyone really believe that McDonald's employees are suddenly less friendly than before? Isn't the problem actually that customers are more dissatisfied with their orders?

McDonald's is working on a fix. It's implementing a new system in which a dedicated employee at the opposite end of the order counter will be tasked with handing out orders, fulfilling last-minute requests, and actively correcting any orders that come out wrong.

That's a good start, but McDonald's has to do more to avoid disappointment in the first place. A simplified menu would be a good place to start.

After all, the Grimace that I remember growing up was always smiling.

Billions swerved
McDonald's turned in a dismal year in 2012, underperforming the broader market by 25%. Looking ahead, can the Golden Arches reclaim its throne atop the restaurant industry, or will this unsettling trend continue? Our top analyst weighs in on McDonald's future in a recent premium report on the company. Click here now to find out whether a buying opportunity has emerged for this global juggernaut.


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