McDonald's Needs a Swift Kick to Remain Fast-Food King

The Golden Arches are lacking innovation and failing to reach an increasingly discerning consumer. In the meantime, industry darlings are pulling further away from the pack.

Jan 29, 2014 at 6:00PM

2013 was not a great year for the king of all fast foods, McDonald's (NYSE:MCD). The Golden Arches fell flat on menu innovation and wasn't able to keep customer flow up to previous standards. In the meantime, fast-casual restaurants continued their assault on all things quick, giving diners better-tasting, higher-quality food in a more appealing setting. Going into the new year, the company certainly has its work cut out for it, but did the end of 2013 show any promise for the road ahead? Let's take a look at recent news for any clues that McDonald's is back on the road to prosperity.

PR
It's one of the few periods in several decades in which it hasn't been very fun to be McDonald's. While the company lunges at anything that might possibly, remotely be considered comparable food to recent fast-casual entrants, the latter are busy honing their expertly crafted image as the new way to eat fast.

Just this week, for example, Chipotle Mexican Grill (NYSE:CMG) announced that it was producing a Hulu-distributed satirical series about the woes of factory farming. The four episodes won't be laden with Chipotle branding or even come across as advertising, beyond the fact that the show's main character's name is Chip. The show will be a funny miniseries about a serious subject -- and one of Chipotle's biggest selling points, sustainable food practices. If it sounds compelling and difficult to picture, it's because it is, and wonderfully so. This "quietly" produced series already has the Internet abuzz and has already accomplished its goal of further distinguishing Chipotle from the awful, no-good, world-ending fast-food giants such as McDonald's.

At the very same time, McDonald's is doing its usual branding efforts, such as its current association with the Sochi Winter Olympics. By no fault of McDonald's, the Sochi Olympics have been incredibly controversial and met with a rather cold reception. It's been branded as an anti-gay, corruption-ridden event where U.S. athletes are being warned not to wear their national colors for fear of retribution.

So, one company is playing perfectly into the nonstop public dialogue regarding healthier eating and more humane treatment of animals, while the other makes chicken nuggets out of "pink goo" and aligns with the meanest sporting event ever.

Chipotle and McDonald's aren't supposed to be the same (even though McD's used to own Chipotle), but you get the picture. The latter of the two needs an image boost to make 2014 a better year.

Evidence
In its fourth-quarter earnings report, McDonald's wasn't able to keep positive same-store sales, though it did (barely) for the full year. Average check amounts increased, but store traffic actually declined.

Investing in McDonald's today is for most an income play, as the company delivers all of its free cash flow back to shareholders in dividends and buybacks. That strong point remains, but there is a fundamental issue here that warrants further investigation. McDonald's doesn't have the mojo it did -- likely a product of both consumer tastes shifting and a somewhat stagnant management team. The company may be able to spike the price of chicken wings with one keystroke, but it can't seem to energize its own demand.

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Michael Lewis has no position in any stocks mentioned. The Motley Fool recommends and 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.

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