Is the Era of McDonald’s Dominance Over?

McDonald's underperformed the market in 2012 and 2013. Will 2014 prove to be different?

Jan 13, 2014 at 7:35AM

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.

They said it couldn't be done. But David Gardner has proved them wrong time, and time, and time again with stock returns like 926%, 2,239%, and 4,371%. In fact, just recently one of his favorite stocks became a 100-bagger. And he's ready to do it again. You can uncover his scientific approach to crushing the market and his carefully chosen 6 picks for ultimate growth instantly, because he's making this premium report free for you today. Click here now for access.

Jayson Derrick has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide, Chipotle Mexican Grill, and McDonald's. The Motley Fool owns shares of Chipotle Mexican Grill 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.

A Financial Plan on an Index Card

Keeping it simple.

Aug 7, 2015 at 11:26AM

Two years ago, University of Chicago professor Harold Pollack wrote his entire financial plan on an index card.

It blew up. People loved the idea. Financial advice is often intentionally complicated. Obscurity lets advisors charge higher fees. But the most important parts are painfully simple. Here's how Pollack put it:

The card came out of chat I had regarding what I view as the financial industry's basic dilemma: The best investment advice fits on an index card. A commenter asked for the actual index card. Although I was originally speaking in metaphor, I grabbed a pen and one of my daughter's note cards, scribbled this out in maybe three minutes, snapped a picture with my iPhone, and the rest was history.

More advisors and investors caught onto the idea and started writing their own financial plans on a single index card.

I love the exercise, because it makes you think about what's important and forces you to be succinct.

So, here's my index-card financial plan:


Everything else is details. 

Something big just happened

I don't know about you, but I always pay attention when one of the best growth investors in the world gives me a stock tip. Motley Fool co-founder David Gardner (whose growth-stock newsletter was rated #1 in the world by The Wall Street Journal)* and his brother, Motley Fool CEO Tom Gardner, just revealed two brand new stock recommendations moments ago. Together, they've tripled the stock market's return over 12+ years. And while timing isn't everything, the history of Tom and David's stock picks shows that it pays to get in early on their ideas.

Click here to be among the first people to hear about David and Tom's newest stock recommendations.

*"Look Who's on Top Now" appeared in The Wall Street Journal which references Hulbert's rankings of the best performing stock picking newsletters over a 5-year period from 2008-2013.

Compare Brokers