Is the Era of McDonald’s Dominance Over?

Throughout 2013, McDonald's (NYSE: MCD  ) global quarterly same-store sales comparisons eased as the year progressed, falling from 7.3% in the first quarter 2012 to 0.1% in the fourth quarter. The increasingly favorable comparisons meant very little as both global and U.S. two-year same-store sales trends materially decelerated in 2013 despite these favorable comparisons.

McDonald's blamed its weak 2012 performance on the combination of a lack of meaningful new food items and its relatively late response to increasingly value-focused promotional activities from competitors. In 2013, McDonald's was more aggressive with both new products and promoting value, but the company's market share losses may suggest that its woes are simply a result of failed products and the increasingly competitive nature of the quick-service restaurant industry.

ITG Research analyst Steve West said on Dec. 9, 2013: "McDonald's is still struggling more mightily than their Mighty Wings," referring to its recently introduced chicken wings menu offerings that have failed, leaving the company with 10 million pounds of unsold wings. Additionally, according to Reuters, McDonald's "has been slower than those rivals to tempt diners with limited-time specials and promotions."

McDonald's is out of excuses and has repeated its 2012 failures throughout 2013.

One more chance?
In 2013, McDonald's drastically underperformed the S&P 500 and was the fourth-worst performer within the Dow Jones industrial average.

Given McDonald's status, balance sheet, and history of bouncing back from tough periods, investors are now asking if they should give shares another chance in 2014. After all, McDonald's has a leading brand, advertising, overhead, property ownership, and unit economics.

Over time, McDonald's major stock drivers are its return on invested capital improvement, earnings per share revisions, and growth. Over the past year or so, these metrics have moved sideways, and there is no indication that 2014 will prove to be any different.

Check out the competition
Burger King Worldwide (NYSE: BKW  ) and its 100%franchised business model offers investors stability and predictability of earnings with low capital requirements.

Burger King, unlike McDonald's, has seen success in launching new menu initiatives. The company recently launched its SatisFries, which are French fries with 40% less fat and 30% fewer calories than McDonald's. Burger King, rightfully so, advertised its new fries as "healthier" and not healthy. Time Magazine said that "while most of [Burger King clients] aren't expecting to get a health boost from their meal, heightened awareness about diets and nutrition, and the role that fried foods play in obesity, are starting to weigh on customer's choices."

McDonald's does offer sliced apples and salads that customers can chose as an alternative to fries, but food choices are often made on impulse, not intellect. According to food research firm Technomic, 47% of Americans say they want healthier restaurant options, but only 23% of them actually order one.

"We know that attitudes are changing and our consumers are becoming more mindful of the foods that they eat. But changing attitudes is much different than changing behavior. We have seen time and time again that consumers don't want to sacrifice the food they love," said Burger King's CMO Eric Hirschorn.

Sustainable? what's that?
McDonald's has pledged to begin purchasing beef from sustainable sources in 2016. Many media publications questioned what exactly the term means, as it is very ambiguous. In fact, Businessweek published an article titled "McDonald's Promises Sustainable Beef -- and No One Knows What That Is."

Chipotle Mexican Grill (NYSE: CMG  ) , on the other hand, has pledged to become completely GMO-free, something that consumers can easily understand and appreciate.

Chipotle's accelerating traffic momentum has led the company to unusually high unit sales averaging $2.1 million per locationwith extremely strong margins. Its current store count is minuscule compared to its growth potential, and many analysts say Chipotle could double its total number of locations to 3,000 restaurants in the U.S. alone without cannibalizing sales at existing locations.

Most importantly, the company will benefit from improved throughput, continued roll-out of catering and new items, a future mobile/loyalty program, and strategic marketing.

Chipotle should be able to sustain long term EPS growth while its other concepts, such as ShopHouse Southeast Asian Kitchen and Chipotle International, start to gain scale. An introduction of breakfast items at Chipotle Mexican Grill (as has been rumored since the company began offering coffee) could also drive growth.

Foolish take
McDonald's truly revolutionized the food industry on its way to global dominance. That said, the fact that McDonald's market cap is more than twice the size of Chipotle Mexican Grill and Burger King's combined doesn't automatically infer it is the better investment choice.

Burger King is gaining momentum by finding the perfect balance between offering healthier items and not forcing customers to completely give up on their french fries.

Chipotle Mexcian Grill has established a niche position as an upscale quick-service restaurant where customers accept its higher costs in exchange for a better dining experience.

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