Why McDonald's Should Take Its Competition Much More Seriously

McDonald's is still one of the most universally recognized brands in the world, but smaller competitors Chipotle and Panera are eating its lunch.

Feb 11, 2014 at 4:00PM

For many years, fast-food giant McDonald's (NYSE:MCD) could do no wrong. The company was the unquestioned leader in the fast-food industry. It grew into a corporate empire, serving billions of customers around the globe. This vaulted the golden arches to become one of the most valuable and easily recognized brands in the world.

Currently, McDonald's faces a much less certain future. Americans are paying much closer attention to their eating habits, and as they learn more about what they're eating, they're increasingly turning away from McDonald's. While McDonald's still has a lot to offer investors in terms of worldwide growth potential and compelling cash returns, it's nevertheless time to start taking its competitors seriously.

New menu items couldn't stem the tide
Consumer preferences are changing in the United States, and it's clear that McDonald's is flailing in its attempts to reverse course. As Americans have become much more conscious of what they're eating, McDonald's is often seen as a stale corporate giant that simply doesn't care about public health. In response, McDonald's has revolutionized its menu, offering healthier options to try to woo health-conscious consumers. Unfortunately, this hasn't had the positive results McDonald's was hoping for; guest traffic declined last year.

The response by consumers has simply been to eat elsewhere, and the results are now becoming obvious. Last year, McDonald's reported 2% revenue growth and 4% growth in diluted earnings per share. Global comparable-store sales, which include sales only at locations that were open for at least one year, inched up 0.2% during the year.

Consumers who prefer healthier alternatives have flocked to Chipotle Mexican Grill (NYSE:CMG) and Panera Bread (NASDAQ:PNRA). Chipotle registered impressive 5.6% comparable-restaurant sales in 2013 as well as 18% total revenue growth last year. Management specifically cited increased traffic as the primary reason for its strong results in the fourth quarter and for the full year, and it seems that customers who used to go to places like McDonald's are now going to Chipotle instead.

While Chipotle may not seem like a direct competitor to McDonald's due to its reputation as a "fast-casual" restaurant, it's nevertheless a different place for wary McDonald's customers to go if they want healthier options. Customers appear to be entirely willing to pay higher prices at Chipotle and Panera in exchange for better-sourced food with fewer calories.

For its part, Panera's diluted earnings per share jumped 17% through the first three quarters of the fiscal year on the strength of an increase in the average customer check amount. And Panera expects the trend to continue, since management expectations call for as much as 3% same-restaurant sales growth in the fourth quarter.

McDonald's still has a lot to offer
As an investment, McDonald's can definitely still satisfy investors' hunger for returns. First, since it's such an established company, it doesn't need to retain all of its cash flow to reinvest in growing the business. Instead, McDonald's distributes lots of cash back to shareholders in the form of share repurchases and dividends. This year, management expects to return approximately $5 billion to shareholders.

In addition, McDonald's has a great opportunity ahead in the emerging markets. McDonald's has still by no means fully penetrated emerging economies. This is why McDonald's plans to spend as much as $3 billion next year to open at least 1,500 new restaurants, with most of this being allocated to the emerging markets.

Time to get serious
McDonald's tried to respond to changing consumer attitudes by offering healthier alternatives such as wraps and salads. These options haven't really moved the needle, though, which is evident in McDonald's lackluster sales and earnings growth last year. The hard truth McDonald's is now realizing is that no company is immune to shifting consumer tastes. McDonald's can no longer stand by while smaller competitors steal its business.

McDonald's will still pump out hefty cash flow and pay a solid 3.4% dividend, but growth is slowing. Its underlying results disappointed last year, its stock performance badly lagged the market, and its 5% dividend increase was widely viewed as a disappointment. As a result, it's time for McDonald's to take its competition more seriously.

Get serious about your own financial future
Millions of Americans have waited on the sidelines since the market meltdown in 2008 and 2009, too scared to invest and put their money at further risk. Yet those who've stayed out of the market have missed out on huge gains and put their financial futures in jeopardy. In our brand-new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal finance experts show you why investing is so important and what you need to do to get started. Click here to get your copy today -- it's absolutely free.

Bob Ciura owns shares of McDonald's. The Motley Fool recommends and 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers