McDonald’s Is Still not Addressing its Biggest Problem of All

Recent earnings for McDonald's disappointed the market yet again. This occurred even though industry peers like Wendy's and Sonic beat expectations for their last few quarters. Before McDonald's can beat expectations, it first needs to address its biggest problem of all.

Feb 8, 2014 at 3:00PM

McDonald's (NYSE:MCD) fourth-quarter and full-year 2013 results marked the fifth-straight  quarter of disappointing sales. Operating results seem to have hit a plateau larger than the one in Tibet since Don Thompson took over as CEO in 2012 -- replacing the mastermind behind the early 2000's comeback, Jim Skinner. However, Don Thompson is not the biggest problem for McDonald's -- and, in fact, he is hardly to blame for all of the company's predicaments.

Recent outperformances by industry peers like Wendy's (NASDAQ:WEN) and Sonic (NASDAQ:SONC) have only added pressure on McDonald's to keep up with the competition and execute quarterly. However, before McDonald's can beat expectations, it first needs to address its biggest problem of all -- being everything to everyone.


Credit: McDonald's website.

McDonald's fourth-quarter earnings and conference call
The key takeaway from McDonald's 2013 fourth-quarter earnings was the decline in domestic comp sales of 1.4%, while global comp sales fell 0.1%. For the year, McDonald's did see 2% increases in both revenue and net income of $28.1 and $5.6 billion, respectively. However, the conference call revealed that a 3.1% menu pricing increase for the year helped offset lost traffic.

In contrast, preliminary 2013 fourth-quarter earnings for Wendy's revealed that comp sales rose 3.1% for the quarter and 1.9% for the year. Likewise, Sonic reported strong first-quarter 2014 results at the beginning of this year with system-wide comp sales increasing 2.2%.

Is McDonald's taking on the world?
In 2012, McDonald's tried to increase profit margins when it revealed an Extra Value menu that wound up not doing so well with customers.

In 2013, a string of menu items were introduced to unrelated parts of the menu that included Fish McBites (January), Premium McWrap and Egg White Delight (April), Quarter Pounder changes (June), and the infamous Mighty Wings (September).

Recently, McDonald's revealed that it now wants to increase "coffee-driven visits" in a U.S. strategy that goes out to 2016.

Overall, these strategies appear to be taking McDonald's further and further away from core offerings like its Big Mac.

The fact that McDonald's said one of its top priorities was improving its coffee lineup, just a week after its earnings report, suggests that the company is still indecisive about its next move.

MCD Chart

MCD data by YCharts

How many priorities can McDonald's realistically handle?
During the earnings conference call, McDonald's referenced numerous priorities: optimizing the menu, modernizing the customer experience, planned kitchen investments across all 14,000 U.S. locations, staffing improvements, and creating more of a coffee culture at McDonald's.

As with its admittedly overcomplicated menu that now has over 180 items, the company's priority list seems just as long.

A scientific control is often used to minimize the effects of variables other than the single independent variable being studied. This not only increases the reliability of the results from an experiment, it highlights exactly what works and what doesn't.

If improved coffee succeeded, but McDonald's also made its menu less complicated by removing breakfast items and thereby caused customer traffic to decline overall, was the improved coffee or the reduced breakfast menu a failure?

Where change may be helpful for McDonald's
Wendy's has been successful where McDonald's has not during the past year. Limited offerings like the pretzel burger helped Wendy's stock rebound and increased foot traffic. The company's short-term strategy that focuses on system optimization has led it to keep pace as it franchised 415  restaurants by the second quarter of 2014.

Sonic has also been enhancing its brand by introducing drive-in prototypes that meet the needs of different markets. For example, Sonic's new Buffalo, New York drive-ins will feature enclosed dining areas to meet weather requirements in the winter months.

It is estimated that McDonald's will invest $200 million in the upcoming winter Olympics, which includes TV spots and advertisements throughout the games. However, fast-casual king Chipotle has historically taken a much different marketing approach.

Chipotle relies mainly on billboards, radio, and word-of-mouth to advertise. It wasn't until the 54th Grammy Awards in 2012 when the company aired its first nationally televised commercial. Later in February this year, the company will break the mold again by starting an online show on Hulu called Farmed and Dangerous. The show is designed to entertain while also getting customers to think about what they eat.

McDonald's can capture several positives from Wendy's, Sonic, and even Chipotle. Both Wendy's and Sonic have focused on a few key strategies and they have been executing them well over the past several quarters. Chipotle has carefully thought out how it wants to market itself and the company continues to follow through by always being itself in the end.

Bottom line
Last month, NPD revealed that 70% of consumers won't try a new menu item. If this is the case, this study might foreshadow the path McDonald's is heading down if it continues to modify its overall menu on a regular basis with limited time offers or other specials while trying to be everything to everyone.

It's great that McDonald's recognized areas where it can improve. However, McDonald's also needs to focus on tackling a few big objectives, executing those, and then moving on to the next tasks. In football, an offense works best when every player is on the same page with a goal of accomplishing one specific task per play. Otherwise, the football never gets closer to the end zone and no progress is made.

What would Warren do?
Warren Buffett has made billions through his investing and he wants you to be able to invest like him. Through the years, Buffett has offered up investing tips to shareholders of Berkshire Hathaway. Now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.

Michael Carter has no position in any stocks mentioned. The Motley Fool recommends McDonald's. The Motley Fool owns shares of 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information