McDonald's Has More Than a Chicken Wing Problem

It's been a rough 2013 for McDonald's. What's the outlook for 2014 and can it surpass Buffalo Wild Wings and AFC Enterprises as the king of chicken wings?

Jan 6, 2014 at 5:30PM

Executives at McDonald's (NYSE:MCD) are glad that 2013 is over. It certainly wasn't their year. Shareholders are certainly disappointed as well since shares lagged the overall market by rising only 7%. The headlines haven't been positive as several of the company's initiatives failed to go over well with customers and employees. Sales remain weak in two of its key markets, the U.S. and Japan. The question now is, will 2014 be any better?

Mighty Wings are not flying
According to The Wall Street Journal, McDonald's is sitting on 10 million pounds of unsold chicken wings. It seems that Mighty Wings did not fly as expected. If the wings don't have freezer burn, maybe McDonald's should call Buffalo Wild Wings (NASDAQ:BWLD) and make a deal. McDonald's might also want to take a page from that company's playbook and learn how to sell wings...or better yet...stick to selling burgers and fries. Burgers and fries don't appeal to a healthy lifestyle, but they did build McDonald's into the giant that it is today.

McDonald's was hoping that its Mighty Wings would go over well during football season. The company purchased 50 million pounds of chicken wings for its fall promotion. The problem is that the wings were too spicy and expensive . To sell the unsold wings, McDonald's plans to offer another promotion of three wings for $2.99.

One fast-food chain that isn't deterred by McDonald's missteps with chicken wings is Popeye's Louisiana Kitchen, part of AFC Enterprises (NASDAQ:PLKI). Popeye's is launching Bayou Buffalo Wicked Chicken served with bleu cheese dipping sauce, regular fries and a biscuit for $3.99. The special promotion lasts until January 26. Popeye's is hoping the special promotion spurs comparable store sales between now and then.

Problems in the U.S. and Japan
In November, global comparable sales increased 0.5%. Europe was the strongest market with sales rising 1.9%. The U.S saw sales drop 0.8% and the weakest market was Asia/Pacific, the Middle East, and Africa where sales dropped 2.3%. The drop in this region was primarily due to weak sales in Japan. Net income for McDonald's Japan is now likely to be half of what was previously expected.

McDonald's is doing a couple of things to try and turn things around in Japan. The first is a price increase for burgers. This is warranted since there hasn't been a price increase since 2008. The company is also closing 74 locations that were not meeting expectations. The goal with these two initiatives is to boost profitability.

Who needs human resources?
McDonald's was hoping that its McResource online site would help boost employee morale. That has certainly backfired for the company. There have been a number of embarrassing incidents that have occurred since the site went live. Finally, the company took the site down after advice was posted on the site on how to avoid McDonald's food at work.

The site went from one extreme of the economic spectrum to the other. There was an incident on the site that talked about how much McDonald's employees should tip their pool cleaners, housekeepers, or au pairs. Presumably this was for executives.

On the other side, McDonald's offered budgeting tips for employees. With the focus on raising the minimum wage, it was basically an admission from McDonald's that its employees cannot live on wages from McDonald's alone.

Not all hope is lost
McDonald's executives aim to turn things around with the company's "plan to win" strategy. Over the long run, the company is targeting systemwide sales growth of 3% to 5% and operating income growth of 6% to 7%. Next year, McDonald's plans to open 1,500 to 1,600 new restaurants and remodel 1,000. While this sounds expensive, the bet could pay off in a big way should it garner increased traffic. However, McDonald's must improve customer service, cut down wait times, speed up the efficiency of its kitchen, and deliver better menu innovations. If McDonald's can achieve these goals, its systemwide sales goals are certainly achievable.

Shares of McDonald's are still relatively attractive and trade at only 16 times next year's earnings. Shares of McDonald's also have an impressive 3.3% dividend yield, which is one of the highest in the restaurant sector. Shares of Buffalo Wild Wings are more pricey and trade at 31 times next year's earnings. Buffalo Wild Wings does not pay a dividend as the company is using its cash to fund its growth plans.

Foolish assessment
It's been a rough year for McDonald's, but this Fool sees better things ahead for the company. A few of the current initiatives  about McDonald's can be found in "Can The McD App Boost Sales at McDonald's?" McDonald's has had setbacks in the past and has overcome each and every one. Look for the same this time and a turnaround in 2014 for McDonald's. 

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Mark Yagalla has no position in any stocks mentioned. The Motley Fool recommends Buffalo Wild Wings and McDonald's. The Motley Fool owns shares of Buffalo Wild Wings and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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