Is McDonald’s Irrelevant?

Has McDonald’s become a rise and fall story? What restaurant chains are really the biggest threats? Is McDonald’s capable of finding a new direction?

Feb 20, 2014 at 4:00PM

McDonald's (NYSE:MCD) CEO Don Thompson recently stated that his company had a customer relevance problem. That's not a good problem to have. Therefore, you might think that McDonald's shouldn't be considered as a potential investment option. It comes down to your investment strategy and risk tolerance. If you would prefer to invest in a restaurant chain that is growing rapidly, then you should consider Panera Bread (NASDAQ:PNRA) or Chipotle Mexican Grill (NYSE:CMG). We'll take a look at some of the reasons why as well as what to expect from McDonald's.

Losing relevance
For decades, McDonald's offered a special treat for families across the United States. It was the ultimate destination for burgers, fries, and a fun playground for the kids. Today, McDonald's is more known for its unhealthy food, unhappy employees, and dirty bathrooms. Of course, there are exceptions to these rules, but you can't argue with mass perception. McDonald's also must contend with increased competition, but that competition often isn't viewed correctly.

Many people think that McDonald's primary competition is Wendy's and Burger King. If you're thinking along the lines of burgers and fries, then yes, this is accurate. However, McDonald's was capable of dominating this competition for many years when they were the key players in the game. Today, a much different environment exists.

The target market is millennials. They're the largest generation since baby boomers and therefore will have the most spending power for the foreseeable future. Unlike baby boomers, these consumers opt for healthier and cleaner options in their younger years, such as Panera Bread and Chipotle Mexican Grill. The adjective "cleaner" doesn't just pertain to the food but the restaurants as well.

Investors should also take note that according to The NPD Group, the average check at fast-casual restaurants in 2013 was $7.40, whereas the average check at fast-food restaurants in 2013 was just $5.30. When you combine growing traffic, market share gains, and a higher average check, you end up with a chart like this:

CMG Revenue (TTM) Chart

Chipotle Mexican Grill revenue (trailing-12 months) data by YCharts

If you look closely, then you will see that Chipotle Mexican Grill is the fastest- growing restaurant chain of the bunch over the past five years. Now look again. This doesn't just go for the top line but the bottom line as well. What more could an investor want? Perhaps a Chicken Salad Bowl.

Yes, you can find a Chicken Salad Bowl at Chipotle, an example of how Chipotle Mexican Grill is more likely to attract the health-conscious consumer (of any age) than McDonald's. And Panera Bread is all about whole grain sandwiches and salads -- also catering to the health-conscious consumer. 

What can McDonald's do to solve the problem? One, it can simplify its menu with an increased focus on healthy food items. Two, it can go the completely opposite route and go back to focusing on simplicity with its burgers and fries (and an emphasis on clean bathrooms wouldn't hurt). Three, it can make its restaurants more entertainment-themed for kids to drive more families to its restaurants.

Whatever route it chooses (answer below), clarity is imperative. Recently, McDonald's has been playing hot foot on two different paths. For instance, McDonald's currently offers a dollar menu "Dollar Menu and More" with prices ranging from $1 to $5. This is like a dollar store selling items between $5 and $10. Consumers love simplicity. McDonald's needs to choose one approach and stick with it. The numbers below prove that something must be done.

Recent results
McDonald's suffered a 3.3% comps decline in January on a year-over-year basis. This followed a 3.8% slide in December. At least November wasn't quite as bad, with comps dropping only 0.8%.

Looking at the domestic picture for 2013, comps declined 0.2% versus 2012 with customer traffic declining 1.6%. On a global basis, customer traffic slid 1.9% in 2013, but thanks to increased prices, sales increased 0.2%.

Franchisees have been complaining about a complicated menu, which makes their jobs harder and frustrates customers. Looking ahead, McDonald's plans to simplify its operations, and its focus will have nothing to do with the dollar menu. Instead, McDonald's will focus on McCafe (primarily coffee) and breakfast. It has yet to be reported what McDonald's will focus on when it's not breakfast time, but at least a direction has been established.

McDonald's is also attempting to reach more millennials through technology, including its McD App, which is basically a digital coupon. However, it's not that easy. Millennials aren't robots infatuated with technology. Rather, they use technology to buy something they want for convenience purposes. Therefore, McDonald's must first offer something that's in high demand before it expects to see significant growth via technological initiatives.

The Foolish bottom line
McDonald's still has growth potential thanks to its massive cash flow generation and global brand strength. And if you're looking for dividend payments, then you might enjoy a 3.4% dividend yield. However, McDonald's needs to establish a direction quickly. If it loses the millennials, then it's going to die a slow death. This isn't a likely scenario but still a scary possibility for the former powerhouse. If you would prefer to invest in a restaurant chain that's on-trend, then you might want to consider Panera Bread or Chipotle Mexican Grill. Please do your own research prior to making any investment decisions.

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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.

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.

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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.

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