McDonald's, You're Doing it Wrong

McDonald's may be closing in on another all-time high, but the fundamentals are going the wrong way.

Aug 10, 2014 at 10:02AM

Things keep going from bad to worse at McDonald's (NYSE:MCD). The world's largest burger chain posted disappointing performance on Friday morning with global comparable sales sliding 2.5% for the month of July.

The chain suffered its sharpest slide in Asia where fears over a supplier's food safety kept customers away in China. The slide finds Janney Capital Markets warnings that McDonald's may post its first full year of global sales decline in 12 years. However, let's not get too distracted with Mickey D's struggling halfway around the world. Comps at U.S. stores fell a brutal 3.2% in July. 

McDonald's blames the domestic shortfall, in part, on the Monopoly promotion that it ran last summer. It countered with the apparently less popular World Cup prize giveaway this time around. This would be an acceptable scapegoat if this was a one-time dip in popularity. It's not. McDonald's has posted negative stateside comps in each of the past three quarters. In fact, outside of checking in with flat sales in April we've seen the burger giant post comparable sales declines every single month in this country since October of last year. 

You deserve a break today
McDonald's is trying. It knows that it veered too far from its value menu roots. The push to go upscale with premium sandwiches, fancy salads, and high-end coffee and smoothie beverages may have made sense on paper, but broadening its menu isn't working. Folks may be spending more, but they're not coming back as often.

Customers also aren't any happier about the quality of its eats. Consumer Reports polled 32,405 subscribers earlier this year on their fast food experiences. When it comes to burgers, McDonald's ranked dead last among the 21 leading chains.

McDonald's isn't simply in an out-of-favor niche. Many of its publicly traded rivals posted positive comps this past quarter. The Big Mac daddy is in a pickle, and it knows that it's going to have to claw its way back into consumer acceptance. 

On Friday morning its gloomy sales report conceded that its working on service, value, and menu initiatives. However, it's been saying this for the past few quarters, and its actions are falling short on the first two fronts. 

McDonald's continues to roll out and promote premium burger and chicken sandwiches, and even this year's push to get franchisees to install deeper prep tables is all about giving the restaurants more ingredients to choose from in assembling sandwiches. It doesn't take a rocket scientist to realize that more choices not only slows down service but also increases the chances of a sandwich assembled incorrectly. 

McDonald's coasted for years on the appeal of its value menu as an all-weather choice for hungry patrons, but now that it has stumbled in trying to upgrade its value profile it's not going to be easy to find its way back.

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Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

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KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.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.

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