Is McDonald's in Trouble?

For the first time in a decade, the fast-food king failed to boost sales in the United States last year.

Jan 25, 2014 at 12:30PM

Things aren't going according to plan at Mickey D's headquarters. Last year -- for the first time in a decade -- McDonald's (NYSE:MCD) failed to boost sales in the United States: Revenue at existing stores dipped by 0.2% in its biggest market in 2013.

Mcd Comp

Source: McDonald's financial filings.

Sure, a lot of that weakness can be explained by the tough selling environment. The industry was flat last year, held back by soft income growth and a still-sluggish economic recovery. And McDonald's was hardly the only food retailer to struggle in 2013. Darden Restaurants (NYSE:DRI), to name just one example, saw customer traffic plummet at Red Lobster after its menu got out of step with price-conscious customers. Darden has even decided to separate that business from its portfolio of restaurants, suggesting that it doesn't see an easy fix for Red Lobster's troubles.

But McDonald's has performed well in exactly this kind of setting before. The industry was flat in 2012 as well, yet the fast-food giant managed to grow sales by a strong 3.3% that year. What was so different about 2013?

According to McDonald's, it was a few things. Management, in a conference call with analysts last week, singled out three main issues that it thinks held the company back last year. First, the fast-food giant tossed too many new and limited-time product introductions at franchisees, overwhelming their kitchens and hurting customer-service levels in the process. Second, McDonald's menu just didn't focus enough on value. And third, the company lost business to quick-service bakeries and cafes such as Starbucks and Panera Bread, which pinched the crucial breakfast results at McDonald's.

The company has already taken steps to fix the pricing issues by instituting a revamped dollar menu. And on the kitchen problem, McDonald's is taking a two-pronged approach to that fix. It's investing on hardware upgrades by installing new prep tables that can better handle a varied menu. The company has also created a new "gatekeeper" position, which will be tasked with ensuring that the pace of product introductions doesn't swamp franchisees. And as for those key breakfast hours, McDonald's has plans to improve its coffee and food offerings around its McCafe products in a bid to win that business back from competitors.

Together, McDonald's is hoping these changes will help get sales growth back on track this year. But the company won't be able to count on an assist from an improving industry: Management expects the challenging market conditions from 2013 to persist at least through this year.

Start 2014 off right
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Fool contributor Demitrios Kalogeropoulos owns shares of McDonald's and Starbucks. The Motley Fool recommends and owns shares of McDonald's, Panera Bread, and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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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