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Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.
Since the start of 2013, shares of McDonald's (NYSE: MCD ) have risen 8.23%, which is a solid year for a company with a market cap of more than $94 billion. But compared to what the Dow Jones Industrial Average (DJINDICES: ^DJI ) and the S&P 500 have done in 2013, those results don't look so great even when adding in McDonald's dividends paid this year. Year to date the Dow Jones is up 22.22%, while the S&P 500 has risen 25.57%.
When we compare McDonald's to its competition -- Chipotle Mexican Grill (NYSE: CMG ) up 74.73%, Yum! Brands (NYSE: YUM ) up 10.17%, Wendy's (NASDAQ: WEN ) up 78.19%, and Burger King up 27.19%, year to date -- the Golden Arches look even worse. In McDonald's defense, comparing it to these much smaller companies is to some degree comparing apples to oranges, considering that Chipotle's market cap is just $16 billion, Yum's is $32 billion, Wendy's is only $3.2 billion, and Burger King currently sits at about $7 billion. But that doesn't change the fact that these fast-food chains are options investors have when considering where to put their money.
It's shocking to me that McDonald's trailed Yum! Brands this year, even though the company behind KFC, Taco Bell, and other chains had a number of issues with chicken safety in China and saw same-store sales tumble earlier in the year.
Let's see what troubles McDonald's faced during 2013.
McDonald's is an American icon that has more locations here than any other fast-food chain. That has its positives and negatives. Over the past few years we have seen a shift in American consumers preferences when it comes to food, most noticeably in a demand for healthier options, which McDonald's is not known for offering. When most Americans think of "fast food" they think of McDonald's, and when they hear "fast food" is bad for you they therefore think "McDonald's is bad food you." That has led consumers to seek other food options, causing same-store sales problems at McDonald's even though the company has rolled out new, healthier offerings.
But that has led to the company's next problem. A host of new offerings being rolled out in a short time frame has produced difficulties with service and quality. Analysts have expressed concerns on the matter, and the company itself told investors in November that it will focus on training and reorganizing food preparation areas to help get product to the customer faster in 2014. Seconds matter in the fast-food, drive-thru world, and if consumers feel they wait longer at McDonald's than they do at Wendy's, then they will likely be ordering from the competition's window next time they want a quick meal.
Furthermore, many have blamed McDonald's move to offer fancier coffee drinks as one of the reasons the company is now having quality and speed problems. In 2009, the company made a move to compete with coffee majors like Starbucks and Dunkin' Brands by offering Frappes and smoothie beverages. Some believe preparing these products eats up workers' time, causing delays for other customers and backfiring on the company.
Getting consumers to change their perception of McDonald's menu options has been a big hurdle for the company and one that it will likely struggle with going forward. But McDonald's also doesn't really fit into the category of good-quality burger joints, so customers' perception that it is no longer putting the "fast" in "fast food" could be an even larger issue. McDonald's may be losing its focus a little bit and attempting to diversify into many areas that it should just leave alone; investors call this diworsification.
Moving forward, management needs to focus on what the company is great at: delivering fast food to customers fast. While new solid-food menu items and healthier options are good moves, the different drinks and items such as Mighty Wings (likely an item focused at competing with Yum! Brands' KFC) are distractions that should be put on the back burner for the time being. McDonald's didn't become the largest quick-serve restaurant in the U.S. by trying to copy what others were doing; it became the best by focusing on what it does right.
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