McDonald's Continues to Lose Ground to Chipotle

McDonald's (NYSE: MCD  ) has a problem. For years now the global fast-food giant has been losing sales to fast-casual restaurant chains Chipotle Mexican Grill (NYSE: CMG  ) and Panera Bread. Customers, especially in the U.S., are turning to other restaurants that offer a more appealing menu with fresher ingredients, allowing them to eat healthier and get more bang for their buck. 

First quarter fails to impress
The only thing investors liked from McDonald's Q1 earnings report on April 22 were the company's plans to open 1,500 to 1,600 restaurants in fiscal 2014 and modernize 1,000 other stores. Revenue, one of the company's highlights for the quarter, increased by just 1% over the same period a year ago, rising from $6.605 billion to $6.7 billion. Earnings per share of $1.21 missed analysts' estimates by $0.05 and were down from $1.26 in the first quarter of fiscal 2013. The company did, however, manage to give back $1.2 billion to shareholders through dividends and share buybacks.

While global comparable sales increased by 0.5%, U.S. comparable sales fell 1.7% because of a decline in consumer traffic. Europe jumped 1.4%, while the Asia/Pacific, Middle East, and Africa group saw a 0.8% increase. 

Fast-casual dining is winning the war
It's hard to imagine any brand that's stronger than McDonald's, so its current troubles suggest that a major shift is going on in the world of casual dining. Fast casual restaurants like Chipotle are in favor. While Chipotle continues to grow and attract more and more customers to restaurants open more than a year, McDonald's has begun to tread water.

Company

FY 2011 Comp sales

FY 2012
Comp Sales

FY 2013
Comp Sales

Chipotle

11.2%

7.1%

5.6%

McDonald's

5.6%

3.1%

0.2%

Sources: Yahoo! Finance, SEC


McDonald's will need to do something bold if it wants to thrive in this more competitive restaurant industry. If it can't secure more sales in the United States, its global comparable sales could look much worse a year from now.

The outlook
Although generating and maintaining consistent comparable sales growth in the United States, Germany, Australia, and Japan remains a top priority to ensure long-term success within the global marketplace, McDonald's is also focused on its global expansion. It also wants to improve the customer experience and strengthen its brand in an effort to fuel its business momentum going forward.

"By leveraging a deeper understanding of what our customers want with the power of our business model, our investments in restaurant capabilities and modernization, and our hard-earned competitive advantages, we will grow McDonald's business and deliver enduring profitable growth over the long term," CEO Don Thompson states in the earnings release.

Thompson expects global comparable sales in the second quarter to be "modestly positive." Compared with last year's Q2, earnings per share are expected to total $1.46 while revenue is expected to increase by 3.5% to $7.33 billion.


Foolish takeaway
While McDonald's remains optimistic about 2014, the most famous fast-food chain of them all has its work cut out for it as it prepares to battle Chipotle for customers and sales. Even though McDonald's has a menu that offers more options for customers, including a handful of healthy alternatives, Chipotle is growing much faster than McDonald's on account of its customer service, quality of food, and restaurant experience. Fast-casual dining is becoming the new normal, and McDonald's needs to focus on jumping on the bandwagon. 

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