Can McDonald's Regain Lost Customers?

On Jan. 23, global restaurant chain McDonald's (NYSE: MCD  ) released the form 8-K that summarized its performance for 2013. While currency-adjusted revenue and net income increased 2% and 3%, respectively, other metrics such as declines in comparable guest counts serve as a possible warning for stormy waters ahead for McDonald's and its shareholders. It also means that competitors Yum! Brands (NYSE: YUM  ) and Wendy's (NASDAQ: WEN  ) may smell blood and move in for the kill. 

Losing customers

Last year McDonald's comparable guest count declined 1.6%, 1.5%, and 3.8% in the U.S., Europe, and Asia/Pacific, Middle East, and Africa, or APMEA regions respectively. The only segment to expand was the "Other Countries & Corporate" segment, which includes "operations in Canada and Latin America as well as Corporate activities," which saw its comparable guest count increase a meager 0.7%. Fewer guests mean lower opportunities to make a sale. Also, it's worrisome that McDonald's guest count slowed down in the U.S. when the American economy actually expanded 2% during that time frame. Moreover, underpenetrated markets should see a robust expansion in comparable guest counts as company popularity increases in the newer regions. Its clear that McDonald's needs to get creative in bringing back its customers.

Getting back on track

As we begin 2014, global comparable sales for the month of January are expected to be relatively flatWhile near-term challenges remain, we are intent on strengthening our brand to further differentiate McDonald's and become an even bigger part of our customers' lives. We have an outstanding brand, the best franchisees, suppliers and employees in the industry and distinct competitive advantages along with the right strategies to deliver sustained, profitable growth over the long term.  

This quote from McDonald's CEO Don Thompson indicates that challenges are here for now and will continue until McDonald's can catch up with the times by enhancing the customer experience. Besides new products and even better customer service, the company is also testing technologies that enable things such as mobile payments, according to Businessweek. He does indicate that the company possesses the resources to overcome these challenges. I

Looking ahead
It's expected that Yum! Brands and Wendy's will report earnings next month. In the middle of January 2014, Yum! Brands gave guidance that suggests it is finally moving on from its avian flu troubles in early 2013. Yum! Brands' same-store sales grew an estimated 2% for its China division in December.  Yum! Brands expects an EPS decline of "high single digit to low double digit" for full-year 2013 versus 2012. Over the long term, its relatively underpenetrated Chinese and Indian territory  and planned massive domestic expansion of Taco Bell should add shareholder value.  

Wendy's expects a year-over-year improvement in its operating income as a result of reimaging and refranchising efforts. Contrary to McDonald's, Wendy's expects same-store sales growth of 2% in North America for 2013.

On the whole, McDonald's should prioritize bringing its customers back in the door. Perhaps mobile technology will do the trick. Obviously, McDonald's faces global market saturation. Most of the future total return for McDonald's shareholders will probably come from dividends versus capital gains. McDonald's may work best in an income-oriented retirement portfolio. Yum! Brands' diverse portfolio of businesses such as KFC, Taco Bell, and Pizza Hut will give it an edge over McDonald's; if one type of business doesn't work out, then it can focus on the ones that do. Over the long term, Wendy's and its franchisees only operate 6,500 stores, giving it a great deal of expansion room versus McDonald's and Yum! Brands. McDonald's is not done, but don't expect robust gains anytime soon.

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