Why Investing in McDonald's Should Not Be on Your Menu

Sales figures say that customers are turning away, as should investors.

Apr 29, 2014 at 2:36PM

McDonald's (NYSE:MCD) posted its first quarter report last Tuesday. Its sales figures give us an indication that  this is not the best time to invest in McDonald's.

Don't blame the weather...well, not completely
The first quarter report cited severe winter weather as a key reason for why domestic sales were down 1.7% and operating income dropped 3%.

However, while the unusually rough winter no doubt played a part, it can't be held entirely responsible. Forbes quoted ITG Investment research analyst Steve West as saying, "You look at Chipotle's (NYSE:CMG) numbers and ask why didn't weather affect them?"

He was referencing the fact that Chipotle posted a 13% increase in U.S. comparable store sales during its first quarter.

The menu that doesn't end
West went on to cite menu choice as a key reason for Chipotle's rise and McDonald's drop. He was talking specifically about Chipotle's appeal to customers with healthy items, but his remark takes on added significance when you consider the following statement from McDonald's first quarter report: "Looking ahead, the U.S. remains focused on improving the restaurant experience through a continued commitment to operations and service excellence, customer engagement and menu choice to drive sales and profitability."

That reference to service and menu choices echoes what chief operating officer Tim Fenton said months ago during the conference call for the 2013 fourth quarter report when he stated, "We need to do fewer products with better execution."

The Wall Street Journal reported that McDonald's executives said during that conference call that the McDonald's menu had gotten too large for the outlets to function efficiently. The restaurants couldn't serve the customers in a timely manner.

So, the latest quarterly report indicates that the problem has not been rectified, and that McDonald's is still trying to correct its customer service.

Meanwhile, the competition keeps scoring
In comparison, Burger King (NYSE:BKW) gets praise from analysts for keeping a simple menu, adding principally only items that will create buzz in the marketplace— items such as the reduced-fat Satisfries, which according to a Burger King press release from March 2014, is now the standard fries in its kid's meals.

Burger King CEO Daniel Schwartz said in a company statement, "In North America our focus on launching fewer more impactful products helped drive improved sales trends as the year progressed." Schwartz was referring to Burger King's fourth quarter net income, which rose 37%.

Other rivals beside Burger King are also scoring points with customers at McDonald's expense. After Yum! Brand's (NYSE:YUM) Taco Bell introduced its new breakfast menu starring the Waffle Taco, McDonald's was forced to respond with a two-week nationwide campaign of free breakfast coffee in an attempt to keep regular customers from sampling Taco Bell's morning menu.

The Associated Press reported that Taco Bell's longer breakfast period also has McDonald's considering stretching its own breakfast hours just to keep up. 

McDonald's was also feeling domestic pressure from Yum!'s KFC restaurants, and thus went directly after KFC by introducing Mighty Wings some time ago. However, the McDonald's chicken product wasn't a huge seller. Many analysts have pointed to the price being too steep as McDonald's wings were priced higher than those at KFC. So, with a considerable stock of unsold chicken on hand, McDonald's had no choice but to reduce the price during a recent lackluster campaign.

Things to consider
McDonald's is obviously still struggling to rein in its runaway menu. The company hopes that a more selective and focused approach to creating its menu will bring back U.S.customers.

The fact that the last two quarterly reports have highlighted the same problem indicates that fixing it is not an easy task. The problem could remain for some time. Meanwhile, disgruntled customers may switch to competitors such as Chipotle, Burger King, or Taco Bell.

The sales figures definitely tell investors that now is not the best time to invest in McDonald's.

Will this stock be your next multi-bagger?
Give me five minutes and I'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks 1 stock with outstanding potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252% and 1,303% over the subsequent years! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.

Joseph Wilborn has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide, Chipotle Mexican Grill, and McDonald's. The Motley Fool owns shares of Chipotle Mexican Grill and 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.

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