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Is McDonald's Running Out of Ideas?

Two all-beef patties, special sauce, lettuce, cheese ... .you know the rest. Image source: McDonald's.

McDonald's (NYSE: MCD  ) sells an impressive 600 million Big Mac sandwiches a year. Credit for the invention of that hit product goes to one of the company's first franchisees, Jim Delligatti, who in 1968 persuaded the chain to put his store's sandwich into nationwide distribution.

But the beef-stacked burger might never have reached its blockbuster status without the contribution of a 21-year-old secretary named Esther Rose: She helped persuade management to drop the name "Blue Ribbon Burger" in favor of the now-iconic "Big Mac." Suffering from a "Blue Ribbon Burger" attack just doesn't have the same ring.

But the level of innovation seems to be running low at McDonald's these days. The company said this week that sales for October barely matched last year's numbers, rising by just 0.2%. New menu introductions including Mighty Wings and a pumpkin spice latte failed to drive improvement from the already-sluggish 0.7% sales growth pace it set last quarter. (Buffalo Wild Wings and Starbucks can relax for now).

Yes, the food-service industry is struggling overall. You can see evidence everywhere from Darden Restaurants, which is losing traffic at its Red Lobster and Olive Garden locations, to McCormick  (NYSE: MKC  ) which isn't selling nearly as many spices to food-service businesses. People are being very cautious with their dining-out dollars.

However, consumers have shown a willingness to pay up for food innovations. Yum! Brands' (NYSE: YUM  ) Taco Bell is still basking in the crunchy afterglow of its Doritos Locos invention that's sold more than 500 million units so far. The brand grew sales by 2% last quarter, following the 7% bounce that Taco Bell logged in the same period last year. And Chipotle Mexican Grill (NYSE: CMG  ) hasn't been shy about mixing things up, either. It's introducing tofu into the fast-food world, and rolling out its Sofritas option to about 40% of stores by the end of this year. The burrito roller notched a scorching 6.2% sales bump in the third quarter.

The Big Mac just turned 45. Image source: McDonald's.

Nobody is arguing that McDonald's needs to go vegan to hunt for more revenue, but it sure seems overdue for some innovation. The McGriddle was a bona fide hit -- when it was introduced a decade ago.

In the short run, McDonald's has plenty of levers to pull for quick sales gains. Last year's fourth-quarter results, for example, were goosed by limited-time introductions of the Cheddar Bacon Onion Burger and the yearly favorite, the McRib. Long-term growth will need something with a bit more staying power, though.

The Big Mac turned 45 this year, an age at which a lot of people get tagged with going through a midlife crisis. Things aren't quite so dramatic at Mickey D's; the company did manage to generate $9 billion in operating income last year. And Wall Street expects $5.56 in per-share earnings this year, above the $5.36 McDonald's posted last year.

And as for the sandwich, McDonald's isn't exaggerating much in saying that it has a place "next to baseball and apple pie" in American pop culture. Mickey D's next hit innovation doesn't have to be nearly that successful to help spur solid sales growth, but it will have to do better than chicken wings or flavored coffees. 

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Related Tickers

9/23/2016 4:00 PM
MCD $117.17 Down -0.19 -0.16%
McDonald's CAPS Rating: ***
CMG $413.81 Up +3.65 +0.89%
Chipotle Mexican G… CAPS Rating: ****
YUM $90.64 Up +0.17 +0.19%
Yum! Brands CAPS Rating: ****