Has McDonald’s Lost Its Luster?

At one time, Americans would flock to McDonald’s restaurants for fast food, good value, and playgrounds for their kids to play on. Can it get its groove back?

Jan 31, 2014 at 12:45PM

McDonald's (NYSE:MCD) has become an enigma to many investors. Many people feel as though McDonald's is missing out on the rise of the health-conscious consumer, many of which are millennials. Millennials are an important generation since they're the second-largest generation outside of baby boomers.

Therefore, millennials need to be targeted if McDonald's wants to increase sales going forward. The tricky part is that McDonald's can't immediately switch to all healthy food because this would lead to the loss of its core customers, as in those who aren't health-conscious and are visiting McDonald's for burgers, chicken, and fries.

What many people don't see is that McDonald's takes a very patient approach to its identity change. This way, it can keep its core customers while also attracting new customers. 

Three important goals
Due to McDonald's having a difficult time attracting more customers, it has three new goals to improve foot traffic. These goals include faster service (by increasing staff at peak hours), better value offerings, and raising awareness that McDonald's serves high-quality food. The latter goal seems like a stretch. No one -- including those who eat at McDonald's often -- would refer to McDonald's as high-quality food. In fact, many millennials see it as low-quality food, which is why many of them would prefer to eat at Subway, Panera Bread (NASDAQ:PNRA), or Chipotle Mexican Grill (NYSE:CMG).

A recent study conducted by Barkley, The Boston Consulting Group, and Service Management Group revealed the seven favorite fast food/quick-service restaurants for millennials.

Wendy's came in at No. 6, McDonald's ranked No. 5, Taco Bell (subsidiary of Yum! Brands) was No. 4, Subway ranked No. 3, and Panera Bread and Chipotle Mexican Grill took second and first place, respectively. Therefore, Panera Bread and Chipotle Mexican Grill are likely to benefit most from the future spending power of millennials in the fast-food/quick-service space.

Unfortunately, McDonald's hasn't reported any information on how it will change the public's perception to view McDonald's as a restaurant that offers high-quality food. If McDonald's accomplishes this goal, then it will likely hit margins in a negative manner since higher-quality food is more expensive to purchase. The only way to win would be to do a lot in volume, which is possible if marketing is effective.

In regards to better value offerings, this would be wise. At the moment, the McDonald's menu is way too complicated. Customers at counters and drive-thrus are spending too much time trying to figure out what they want to order, which slows down the speed of orders being processed. By simplifying the menu -- perhaps with more enticing value offerings -- this process could be expedited.

It should also be noted that McDonald's target customer isn't doing well right now. While all those layoffs on Wall Street lead to stronger bottom lines and stock appreciation, they don't help working-class citizens. Therefore, improved value- menu offerings could attract more customers.

The catch is that it will be difficult for McDonald's to offer high-quality food and improved value-menu offerings without making the menu confusing.

The takeaway? 

The bottom line
While improved value-menu offerings would help drive more traffic at the moment, it's imperative that McDonald's alters its image to cater more to the health-conscious consumer if it wants to thrive. It can survive with its current approach, which will still lead to significant cash flow generation and capital returns to shareholders, but without innovation and becoming more on-trend with industry changes, thriving would be nearly impossible. 

Expect McDonald's to tinker with its menu to drive more traffic from its current core customer base while also attracting more health-conscious millennials. Given McDonald's history, it won't want to move in any direction too fast. Therefore, if you're looking for short-term results with an investment in McDonald's, you might be disappointed.

Long-term investors, on the other hand, should be patient. McDonald's has overcome headwinds since 1940. It has one of the strongest brand names in the world, which gives it strong potential over the long haul, as long as it markets its future offerings correctly, which is likely. Please do your own research prior to investing. 

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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill, McDonald's, and Panera Bread. The Motley Fool owns shares of Chipotle Mexican Grill, McDonald's, and Panera Bread. 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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