Plainly put, there are few brands in the world with better recognition and value than fast-food chain McDonald's (NYSE:MCD). According to research firm Interbrand, which conducted a study in 2013 ranking the 100 most valuable global brands based on its own proprietary formula, McDonald's came in seventh place, ahead of media giant Disney, chipmaker Intel, e-commerce giant Amazon.com, and soft-drink behemoth PepsiCo.
Just last year, McDonald's delivered $28.1 billion in sales, racked up nearly $5.6 billion in net income on a juicy operating margin of 31.2% -- well ahead of most casual-dining restaurants -- and netted $4.3 billion in free cash flow, which helped fund its more than $3-per-share annual dividend.
Yet its growth has essentially stalled, with its share price widely underperforming the overall market over the past two years. Since July 2012, McDonald's shares have relied heavily on dividend disbursement to claim a 17% rise. Comparably speaking, the broad-based S&P 500 has scorched 45% higher.
This underperformance has left many analysts and investors scratching their heads as to what's wrong with McDonald's. The way I see it, there are seven key reasons the Golden Arches have lost their luster and why any potential upside in the share price has been, and will continue to be, stymied.
In no particular order, McDonald's problems boil down to the following:
Consumers' healthier eating habits
If my arm were twisted and I was forced to single out a specific problem that stands out as more pressing than the rest, I'd suggest that consumers' want for more nutritious food choices is its biggest shortcoming.
Understandably, McDonald's has done what it can to improve its menu selection, including being the first fast-food restaurant chain to offer salads and snack wraps last decade and removing trans fats from its fries in 2008. However, the general impression of McDonald's is that it's still a fast-food restaurant whose heart and soul lies with hamburgers and French fries.
Take, for instance, McDonald's most famed meal -- the Big Mac with large fries and a soft drink. Utilizing McDonald's USA nutrition fact guide, this meal would supply consumers with 82% of their daily value of total fat and 52% of their daily sodium intake, and if they purchased a large Coca-Cola, it would pack in more than 1,300 calories.
I'm by no means the nutrition police, but with more than a third of U.S. adults considered obese, and roughly two-thirds tipping the scales as overweight or obese according to body mass index calculations, McDonald's is fighting a losing battle against comparably priced but healthier-choice fast-food chains such as Chipotle Mexican Grill.
McDonald's subpar taste reviews
Consumers also have to like what they eat, and frankly, McDonald's isn't bringing its best to the table, according to the latest study from Consumer Reports.
As Consumer Reports notes, out of the 96,208 meals studied across 65 different restaurant chains, its respondents are caring more about the quality and taste of the food in recent years than proximity to their home. In other words, if consumers find a product that tastes great, they'll be willing to go out of their way to get it. Topping the list for burgers were a number of rapidly growing quality chains such as In-N-Out Burger and Five Guys Burgers and Fries. At the very bottom of the burger list was McDonald's.
Not only did consumers cast McDonald's at the bottom in terms of taste, but it was also in last place by a considerable amount -- a full 0.8 points behind the second-lowest burger on a scale of zero to 10.
Just as we're seeing craft beers pop up to steal business away from major breweries, we're seeing consumers' desire for craft burgers and quality products trumping simple things like proximity to their home.
Its lack of an all-day breakfast menu
Breakfast is big business in the U.S., and McDonald's is missing the boat when it comes to this rapidly growing phenomenon. Despite seeing some of its key rivals, such as Jack in the Box, succeed by offering breakfast 24 hours a day, McDonald's stops serving breakfast at 10:30 a.m. in most locations and hasn't changed this policy in a long, long time.
As a Business Insider report noted last year, the primary reason for this policy is that McDonald's doesn't make its breakfast products to order, as that would slow down its ability to get indoor and drive-through customers quickly through the line. Instead, it pre-cooks all of its eggs and sausage patties, which will only stay fresh and available until a specified time each day.
Don't get me wrong; McDonald's has tinkered with the idea of expanding its breakfast hours, but management still appears too concerned that a major change would slow down the pace at which customers are served. However, consumers have made it pretty clear that an around-the-clock breakfast menu is becoming almost a necessity to drive additional business.
A bevy of PR nightmares
Another reason consumers have been avoiding McDonald's is its poor public image. McDonald's has regularly been at the forefront of the minimum-wage debate in recent years, but its McRoyally stuck its foot in its mouth last summer, when it and collaborative partner Visa released a sample monthly budget for its employees to reference on its employee website.
Although you can find the full details of its comical monthly budget breakdown here, McDonald's "sample budget" assumed that workers would get a second job, that they'd manage to find health care for $20 per month (in what universe?), and that $100 a month would cover their food, groceries, gas, and child care expenses. Best of all, the original version of this sample budget didn't factor in any money for heating a home!
Shortly after this controversy erupted, McDonald's took its employee website offline, but the damage has already been done to its image.
When companies grow too big for their own good, the quality of service can suffer, which is what we're beginning to see with McDonald's.
Based on a survey of McDonald's franchisees obtained last year by The Huffington Post, the addition of new menu items to McDonald's menu has slowed its kitchens to a crawl and is beginning to negatively affect customer service. McDonald's has around 145 items on its menu now, about 70% more than it had seven years ago, and each of these new items requires franchisees and managers to train their staff on how to prepare them. The concern is that as more choice is added to the menu in an effort to appeal to a wider audience, McDonald's workers will need more time to prepare these items, thus slowing the fast-food assembly line and hurting its last remaining advantage: speed of service. As you'll note, this is one of those lose-lose situations for McDonald's. It held back from expanding its breakfast menu for fear of crowding its lines, but it would appear based on franchisee responses that other menu additions outside of breakfasts have done just that.
A loss of pizzazz on the value menu
For as far back as I can remember, the allure of McDonald's has always been its Dollar Menu. Even though the Dollar Menu may not bring the company its most robust margins, simply creating a loyal following of consumers and driving new traffic is far, far more important to the long-term health of the brand.
However, today's "Dollar Menu & More" is a far cry from the Dollar Menu of even 10 years ago. Gone are the French fries and the list of roughly a dozen products you can snag for $1. Instead, they've been replaced by a more diverse array of food products, of which just a handful now sit at the $1 mark. The Dollar Menu & More features nearly as many value items above a dollar as there are at a dollar, which has, in my view, at least, substantially weakened the emotional connection longtime customers have had with the traditional Dollar Menu.
In short, we all knew inflation would one day catch up with McDonald's and that it would largely have to kiss its Dollar Menu goodbye -- but it's not making things any easier for consumers or the company.
Losing its multi-generational appeal
Lastly, I would opine that McDonald's is losing its multi-generational appeal. When healthier eating habits weren't front and center and craft burger joints weren't popping up left and right, McDonald's was a go-to fast-food chain for consumers. Chances are that baby boomers remember McDonald's in its prime and hardly recognize the company as it stands today.
But as times have changed and millennials have aged, the connection between the old McDonald's and what McDonald's has transformed into has been lost. McDonald's has tried appealing to a younger generation by making its restaurants more inviting, including the addition of flat-screen televisions and free Wi-Fi throughout a number of its locations. Still, those changes haven't allowed McDonald's to truly stand out from a crowded field of fast-food choices, and it's been left struggling with ways to reach a younger generation that it just doesn't quite understand.
Risk-free for 30 days: The Motley Fool's flagship service
Tom and David Gardner founded The Motley Fool over 20 years ago with the goal of helping the world invest ... better. Their flagship service, Stock Advisor, has helped thousands of investors take control of their financial lives and beat the market. Click here to sign up today.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool recommends Amazon.com, Chipotle Mexican Grill, Coca-Cola, Intel, McDonald's, PepsiCo, Visa, and Walt Disney; owns shares of Amazon.com, Chipotle Mexican Grill, Intel, PepsiCo, Visa, and Walt Disney; and has options on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.