Can McDonald's Corporation's Turn Its Fortunes Around?

The Golden Arches have seen falling sales in the U.S. for an extended period due to changing customer wants and increased competition.

Aug 7, 2014 at 7:44AM

McDonald's (NYSE:MCD) has had a rough go of it in the United States. The company reported a drop in sales for U.S. stores in May -- the seventh straight month of declining sales in the fast-food chain's largest market.

The home of the Happy Meal did grow its overall sales .9%, led by strong numbers in Asia. But the U.S., where it makes more than 30% of its overall revenue, was a drag, falling .1%. 

McDonald's has struggled in the face of increasing competition, as well as a general shift toward healthier fare. The brand also faces a challenge created by its longevity.

Because McDonald's has been around so long, it's hard to get people to perceive it as anything other than a peddler of not-good-for-you food.

How bad is it?
In the U.S., McDonald's second-quarter comparable-store sales decreased 1.5%. In its quarterly earnings press release, the company said it is "intent on strengthening the overall customer experience to effectively position the segment for long-term growth. Key areas of focus include service excellence, enhanced marketing, and value, core menu and breakfast daypart initiatives."

The numbers over the past several months are certainly not good, but they are hardly cause to panic. There are clearly flaws in McDonald's plan, and the company can take steps to make corrections.

Why is McDonald's struggling?
McDonald's competes in a very crowded market where it faces assaults on its business from a number of directions. Yum! Brands' (NYSE:YUM) Taco Bell has made an aggressive push into breakfast -- a part of the day that McDonald's has long dominated. 

The Golden Arches control a 25% share of the $50 billion fast-food breakfast market, according to market researcher Technomic. Taco Bell's push, along with competition from Starbucks, has likely stolen some morning customers from McDonald's.

"The industry is not very robust right now" in the U.S., Peter Saleh, an analyst at Telsey Advisory Group told Bloomberg. Taco Bell's entrance into breakfast "could be weighing on them," and Wendy's and Burger King's improved food pose challenges as well.

The biggest challenge, however, may be something that it's not easy for McDonald's to change -- the perception that it serves unhealthy food, while rivals, including the surging Chipotle Mexican Grill (NYSE:CMG), offer healthier fare. While McDonald's saw sales drop in the U.S. in the second quarter, the Mexican-food chain saw revenue climb by a stunning 26%.

Part of the reason Chipotle has been able to gain customers is its careful marketing built around the idea that it offers quality ingredients that people perceive as being healthful. Never mind that a burrito can easily have over 1,000 calories -- more than a Big Mac and a small order of fries, which comes in at 750 calories. Customers believe Chipotle is better for them because it uses more natural and organic products and stresses where its food comes from in its marketing.

Can McDonald's turn it around?
McDonald's is facing a perfect storm of increased competition and changing customer desires. The company can pivot to deal with both, but it has to be a slow change. The public has seen through blatant re-positioning attempts like Kentucky Fried Chicken calling itself KFC as a way to distract people from the fact that it sells mostly fried chicken. People have a certain perception of McDonald's, and changing that will take time. 

The chain has been working on it for years already.

"For a market leader, they've been really aggressive in a pretty fundamental way, but at the same time not losing the core of who McDonald's is," Kevin Lane Keller, professor of marketing at the Tuck School of Business at Dartmouth College told Advertising Age in 2012. 

Some of the perception is unfair, as the above calorie comparison proves. It's not a question of reality, however. It's one of whether the chain can change how people see it.

Adding salads, offering egg whites, and rolling in other healthy choices has done little to change how consumers view the company. That does not mean that with enough money spent on ads -- and perhaps a more honest attempt at offering better food -- the company won't be able to slowly turn things around.

McDonald's is struggling, but its core business remains healthy. The amount of people who want indulgent burgers, fries, shakes, and other treats may be slightly smaller in the U.S. than it was, but it's an audience that's unlikely to dwindle too much. 

McDonald's needs a new product mix to reach beyond the ready market of overweight people and those with kids who just want to get wherever they're going in relative peace. That effort is well under way, and while egg-white breakfast sandwiches have not turned things around, the pieces are starting to fall into place.

The company will never be hip like Chipotle, but it does offer some reasonable choices and an ever-expanding array of options. It may take months or years to reverse the decline, but the right moves are being made. McDonald's may have made some mistakes -- Mighty Wings and the creepy Happy Meal mascot come to mind -- but in the long run, the chain has too strong a core audience to stay down for long.

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Daniel Kline has no position in any stocks mentioned. Jake Mann 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 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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