Is McDonald's Push Toward Healthier Fare Healthy for Profits?

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In recent years, the fast food giants have tried to adapt to the shifting tastes and ideologies of their consumer. The younger generation is a healthier one -- or is trying to be -- and wants access to fare that satisfies the mind as well as the stomach. Fast food forays into calorie- and fat-conscious grub have often been marketing ploys more than anything else, but lately we have seen an increase in options -- a clear indicator that the corporations see at least some opportunity in healthier meals.

The latest is McDonald's (NYSE: MCD  ) , which is planning on offering  salad or fruit as side items instead of delicious, fat-filled French fries. Is this a marketing-friendly effort that will boost traffic and sales, or a profit-eater?

Healthy PR
Nearly every fast food chain has released some sort of better-for-you item. Yum!'s Taco Bell chain  has its Fresco menu that stays away from sour cream and cheese in favor of cilantro and beans. It also did  away with its kids menu and toys, in a show of support for the fight against childhood obesity. McDonald's has had salads on its menu for years now, but they are negligible part of sales and don't pack the punch that a quarter pounder does. In other words, it's more difficult and more expensive to make leaves taste good than a heavily processed cheeseburger.

The new angle McDonald's is interesting in that the company is addressing the matter with side items (fruit instead of fries), a subtle but possibly powerful nod to the idea that you can slowly improve your drive-thru experience -- at least in terms of lessening the chances of heart disease. Moreover, it's a great message to send to the world. McDonald's isn't poisoning you across the board; instead, it's giving you the option of balancing your meal out a bit.

Aside from PR, though, there are some downsides. 24/7 Wall Street analyst Douglas MacIntyre believes that, while noble, this is an earnings-zapper for the company.

Heart-saving profit killers
MacIntyre believes (and rightfully so) that the reason for McDonald's prowess as a food slinger is that its profit, on an ingredient level, is phenomenal. 'Empty calories and sugar,' its main inputs, are cheap for the company, and enable us to enjoy a burger for $1 while still delivering value to the company and its shareholders. Much  of this stems from a flawed farm subsidy system, but that's a different story.

Fruit is expensive, and so is fresh produce. On a larger scale, this would eat into the company's margins.

At this level, we likely won't see any meaningful deterioration in margins or profits. For the majority of people coming to the Golden Arches trough, the smell of fries will go much further than the promise of fewer calories. Health-conscious diners aren't at McDonald's to begin with.

Unfortunately for their business models, fast food companies will have to do much more to address the changing tastes of quick diners. A sincere effort to produce healthier food should ultimately mean not offering the bad stuff -- or at least improving it. Unfortunately, as MacIntyre predicts, that's not nearly as good a business.

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Related Tickers

9/27/2016 4:00 PM
MCD $116.88 Up +0.35 +0.30%
McDonald's CAPS Rating: ***
YUM $89.86 Up +0.34 +0.38%
Yum! Brands CAPS Rating: ****