Can This Back-to-Basics Approach Return McDonald's to U.S. Growth?

With U.S. same-store sales continuing to fall, McDonald's is turning to the products that made it America's favorite fast-food restaurant. Given the success of companies like Chipotle and Starbucks in the fast-casual arena, can the Big Mac return McDonald's to U.S. growth?

Jun 26, 2014 at 12:08PM

Maybe we'll all look at Mighty Wings as the moment when McDonald's (NYSE:MCD) jumped the shark. America's favorite fast-food restaurant is apparently learning just how crowded and confusing its menu has gotten as it's continued to expand its offerings in a effort to serve a wider audience.

Now, McDonald's is looking to reset. CEO Don Thompson is promising a "back-to-basics" approach that emphasizes the company's best-sellers: the Big Mac, the Egg McMuffin, the Filet-O-Fish, and french fries.


Source: Wikimedia Commons.

"Our core products are familiar favorites for our customers," Thompson said in the company's first-quarter conference call. "They truly represent McDonald's to all of our customers, and at about 40% of total sales, they are an incredible business asset for us that requires a constant drumbeat of communication."

Thompson acknowledged that the changes the company is undertaking -- including the marketing focus on the core products -- won't serve as a "silver bullet" to bring the company back to growth in the U.S. But McDonald's must undertake efforts to change the course it's been on in its home market.

Operating income for the U.S. last quarter was down 3%; whole comparable-store sales dropped 1.7%. Comps continued downward last month, and now stand at seven straight months of declines.

Stepping up to fast-casual
The country's fast-food standard-bearer -- along with longtime competitors like Burger King -- has been losing customers to rivals on the fast-casual end, like the fast-growing Chipotle Mexican Grill (NYSE:CMG) chain and Starbucks (NASDAQ:SBUX), which continues to explore ways to extend its food menu.

Chipotle, the one-time McDonald's spinoff, has had great success in part by playing a sort of anti-McDonald's role inside of the fast-food space. The burrito maker has risen above the fierce competition by focusing its marketing on a message aimed at building awareness about food quality and sourcing.

Customers continue to respond. Same-store sales growth for Chipotle was phenomenal, up 13.4% over the first quarter of 2013, an acceleration over the impressive 9% comps number in the prior quarter. Overall revenue for the chain was up 24.4%.

Starbucks, meanwhile, continues to make moves that turn up the heat on the Golden Arches and its conventional fast-food brethren. The company best known for its coffee now serves up a full slate of breakfast sandwiches, lunch, and evening fare. It's made the drive-through a key piece of its expansion plans moving forward, another strike at traditional fast-food players.

And its most recent move may be the most shocking: Starbucks plans to start serving hamburgers at a La Boulange in California.

Making improvements
McDonald's sees three ways to get better: Improve customer service, create more effective marketing, and find a better balance between its traditional, time-proven menu items and new offerings.

The last two go hand-in-hand. The core menu offerings are items that customers have "great emotional connection" with, Thompson said. Those fries and sandwiches are items that some people have eaten their whole lives, at least as an occasional indulgence, and that many have fond memories of enjoying as a kid -- or with their kids.

So, focusing on these products with a "back-to-basics" approach makes sense. At the same time, McDonald's can't rely on these products alone, especially with evolving consumer tastes giving rise to fast-casual competitors promising better, fresher ingredients.

What may play a critical role in maintaining McDonald's balance between variety and a focus on those core products are the new kitchen stations the chain is installing in restaurants this summer. These will provide customers with a wider array of fresh ingredients and condiments to top their sandwiches. That allows for a build-your-own approach that would complement the tried-and-true recipes like the Big Mac.

The Foolish bottom line
In an increasingly competitive fast-food market, McDonald's may have strayed too far from the identity that helped build the company into the country's favorite eatery. A new "back-to-basics" approach that will highlight core successes like the Big Mac and Egg McMuffin will aim to help reconnect customers with the longtime favorites while it looks to venture out into a build-your-own approach.

Will this right the ship in the U.S.? Maybe, but probably not anytime soon. Investors will want to pay careful attention to same-store sales numbers in coming months as these changes get under way.

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John-Erik Koslosky owns shares of Chipotle Mexican Grill. The Motley Fool recommends Burger King Worldwide, Chipotle Mexican Grill, McDonald's, and Starbucks. The Motley Fool owns shares of Chipotle Mexican Grill 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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