McDonald’s Doesn’t Understand Today’s Consumer

(mcdonalds.com)

McDonald's  (NYSE: MCD  )  recently reported weak February comps (same-store sales at locations open for more than one year) of negative 0.3%. This indicates that McDonald's isn't in touch with today's consumer. 

Comps are arguably the most important metric for restaurants and retailers, as they indicate continuous demand and customer loyalty, or lack thereof. If you only consider revenue, then sales at locations opened within the past year will be included, which will skew the actual results.

That said, revenue is still important -- a company opening more net new locations is often confident in its future prospects. If the opposite is true, it will be closing underperforming locations in order to boost its bottom line. In other words, if a company can't impress investors on the top line, then it must impress on the bottom line.

Since comps are the most important number, consider that domestic comps for McDonald's slid 1.4% in February. Comps in APMEA (Asia-Pacific, Middle East, and Africa) declined 2.6%. Fortunately, comps improved a mild 0.6% in Europe. However, if you want the real facts, the United States, Germany, and Japan are dragging McDonald's down. Those are not three economies where a company wants to be struggling, considering they're the first, third, and fourth largest economies in the world as measured by gross domestic product.

McDonald's does have a plan to improve its image with today's consumer, but is it a good one?

The game plan
If you follow McDonald's, then you already know that it doesn't possess a clear-cut game plan. One day, McDonald's will announce that it might expand its breakfast hours and the next it will be customizing dinner menu items; on the third day, it might be a new limited-time offer. McDonald's might want to establish a game plan and stick to it.

One of the company's newest strategies is to hire consultants for domestic locations in an effort to help with staffing and scheduling. While this is likely a minuscule cost for McDonald's ... consultants for staffing and scheduling? Really? Every dollar counts. And while this might be a necessary measure to improve efficiency, it's also a potential sign of weak management.

On the positive side, McDonald's continues to roll out new products, some of them as tests. If these products pass their tests, their exposure is broadened. McDonald's recently launched the Bacon Clubhouse Burger -- with Big Mac sauce. In addition to that, it recently tested its Petite Breakfast Pastries in the San Diego area (results were good.)

Another positive is that McDonald's is considering mobile payments and a loyalty program. Since McDonald's is eager to expand its breakfast/McCafe presence, it's going to find itself pitted against Starbucks  (NASDAQ: SBUX  )  and Dunkin' Brands  (NASDAQ: DNKN  ) . Dunkin' Brands owns Dunkin' Donuts (and Baskin-Robbins.)

Customer loyalty
As far as McDonald's being eager to focus more on breakfast and its McCafe, this seems sensible. It's often stated that caffeine is the greatest drug in the world for investors. Why? Because it's legal and people get mildly addicted to it. Of course, marijuana looks to be making a strong run of late, but that's a story for another time.

Since McDonald's will have to contend with the fast-growing Starbucks and Dunkin' Donuts, it will need to offer the same features. For instance, let's say you love coffee, but you have yet to choose a specific stopping point on the way to work. Where would you go?

Starbucks offers mobile payments and a hugely popular loyalty program. In fact, 10 million people have used the Starbucks loyalty app, translating into 5 million transactions on it per week. Also consider that Dunkin' Donuts offers mobile payments and recently launched DD Perks. The latter is a loyalty program where customers earn points that can be used toward future purchases.

So, with Starbucks and Dunkin' Donuts, you receive more convenience as well as future discounts if you remain loyal to the brand. Therefore, why would you choose McDonald's?

It's clear that McDonald's is behind the curve when it comes to consumer trends. On the other hand, just a 1% increase in market share would lead to an additional $12 billion in sales. Perhaps mobile payments, a loyalty program, and/or new menu items could be catalysts to achieve this goal.

The Foolish takeaway
McDonald's is still the largest restaurant in the world. This allows for massive cash flow generation and generous capital returns to shareholders. On the other hand, McDonald's has proven to be behind the curve for consumer trends. Starbucks and Dunkin' Brands have been on the ball in this regard. Therefore, they're likely to offer greater odds for stock appreciation in the near term.

That said, McDonald's enormous size makes it a difficult ship to turn. If you're concerned about the broader market, then McDonald's offers resiliency while providing a generous dividend yield of 3.4%.

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  • Report this Comment On March 19, 2014, at 4:42 AM, Interventizio wrote:

    "hire consultants for domestic locations in an effort to help with staffing and scheduling." So what are the managers paid for? It should be their job to handle these basic things. Do they have to need external consultants. You're right: it's a bad sign.

    Why don't they ditch the CEO? As an investor, I would be happy to carry the financial burden for ending his contract ahead of time.

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