McDonald’s Menu Is Too Large: Invest in Restaurants That Keep It Simple

More than 100 menu items at McDonald's sounds great for customers, but is it that great for the company's bottom line?

Mar 31, 2014 at 11:47AM

McDonald's (NYSE:MCD) has more than 100 menu choices for its customers, which is simply bad for business. A larger menu implies more ingredients, labor, equipment, and more importantly a staff that needs to be constantly retrained on handling new items.

Mark Kalinowski, an analyst at Janney, conducted a research survey of McDonald's franchise owners to comment on its ballooned menu offering:

Our menu has gotten too big. We are trying to do too many things and our service and quality suffer. Look at In-N-Out Burger, Chick-fil-A, Five Guys [Kalinowski notes: all privately held]. Their menus haven't changed in years and they do not offer discounts on a regular basis."

Speaking of promotions, McDonald's dollar menu could be seen as hurting sales, based on the comments from another operator:

Only thing we are advertising is Dollar Menu & More. We have 25 items on the Dollar Menu with breakfast and lunch. Why would a customer order anything else? Can get a beef, chicken, potato, soda, or coffee. It kills service time with orders of [two-to-three] sandwiches at a time. Cannot hit service times.

Investors are banking on the fact that the company's sheer balance sheet strength and industry-leading marketing power can save the day. Unfortunately, this proved to be insufficient, as McDonald's shares have underperformed the S&P 500 index and the Dow Jones industrial average (of which the company is a component) since 2012. McDonald's has become the "dog of the Dow" with plenty of other competitors offering investors a much stronger growth prospect.

Mcdjpeg

Source: Yahoo! Finance

Bowl, burrito, taco, or salad... that's it
When Chipotle Mexican Grill (NYSE:CMG) reported its fourth-quarter results in late January, the company posted in-line earnings per share of $2.53. But it had blowout comp growth of 9.3%, way ahead of the consensus expectations of around 6% growth. Even more impressive was the fact that Chipotle noted that its December sales were stronger than November, the opposite of most retailers.

Consumers are flocking to Chipotle for many reasons, one of which being it has a simplified menu that allows for quick and efficient food preparation. McDonald's has admitted that it "over-complicated" its menu in 2013 by adding "too many new products, too fast." This could hurt its margins by consumers taking advantage of "menu hacks."

Lifehacker.com explains how a customer could order a "Poor Man's Big Mac" by ordering a McDouble, minus the pickles and ketchup but asking for special sauce, onion, and lettuce instead. "The flavor of a Big Mac is all there at the price of a McDouble," according to lifehacker. "And an added bonus is that you can order three or four Poor Man's Big Macs for the price of one Big Mac."

A McDonald's employee commented on the lifehacker article writing: "These custom 'grill orders' slow us down when we are used to just making a regular burger with the ingredients we are used to."

Chipotle's easy-to-understand menu and pricing do not allow for any "hacks" because what you get is what you see. And if a consumer wants something done differently, such as extra sour cream or a mix of different salsas, it doesn't slow down the production line as it would at McDonald's; at Chipotle, every single food input is already on the counter ready and prepared to go.

In addition to an extremely efficient ordering system, investors should be bullish that during Chipotle's earnings report and conference call, management reiterated new store opening guidance of 180 to 195 units. Plus the company bumped up its same-store sales guidance to "positive low to mid-single digits" from previous low- single-digit growth.

Would you like a beer or perhaps a bacon-wrapped date in a balsamic glaze with that vanilla macchiato?
When Starbucks (NASDAQ:SBUX) announced that it will offer alcoholic beverages and a new menu at thousands of locations across the U.S., many investors viewed this as a surefire way of boosting profits and sales.

The evening is the slowest daypart for the coffee chain, and turning a cafe into a bar seems like a great idea. By doing so, Starbucks would immediately differentiate itself from virtually every other coffee chain.

But at what cost?

According to Brian Sozzi of Belus Capital Advisors, Starbucks will need to invest heavily in training its employees to:

...morph them into waiters and waitresses, meaning they have to constantly be looking around beyond the coffee station, but it must hire additional workers to properly work the tables of people with beers, wine, and evening foods...beer bottles must be collected and removed. Tables have to be worked like a diner to optimize the amount of the items being sold.

Bottom line, Starbucks' decision to expand its offering will certainly make its wait times much longer. And the company runs the risk of alienating its core consumers who just want a plain cup of coffee.

Foolish take
For those who have never heard of a McDonald's menu hack, go out and try it yourselves. Use this experience to think like an investor and note how much longer it takes to order four smaller modified food items. Observe how this slows down the waiting line and if other customers are getting annoyed.  Finally, ask yourself if this is good for the company's bottom line.

Chipotle continues to command a premium because of its high-growth profile and some industry-best sales per square foot. Chipotle will also continue to benefit from its initiative to serve products without genetically modified organisms, which consumers continue to favor.

Starbucks shouldn't be faulted for venturing into new territories and should be given the benefit of the doubt due to its history of innovation and delivering results. After all, alcoholic beverages have a higher margin, so Starbucks could be on to something great with its alcohol initiative.

Investors could find it beneficial to just wait and see how this initiative plays out. But Starbucks could have found the growth initiative needed to propel itself to a $100 billion valuation, which is what Starbucks CEO Howard Schultz hinted at during the company's recent annual shareholder meeting.

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Jayson Derrick has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill, McDonald's, and Starbucks. The Motley Fool owns shares of Chipotle Mexican Grill, McDonald's, and Starbucks. 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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