Good news from McDonald's (MCD -0.07%) is rare these days. The fast-food chain released yet another disappointing same-store sales report recently as comps fell 3.7% globally in August, its worst monthly drop since 2003. The main culprit here was a food safety scandal in Asia, which forced comparable sales in that region down 14.5%, but sales at locations open more than a year also fell in the U.S. and Europe, by 2.8% and 0.7%, respectively.
For the year, comparable sales are down 0.7%, and the stock price has dropped nearly 10% from a high this spring above $103. After McDonald's stock beat all other Dow components in 2011, shares have basically flatlined, losing 5% while the S&P 500 has gained more than 50%.
A number of factors have contributed to the unhappy meals being served up to shareholders, including steep competition from fast casual upstarts like Chipotle at home, a sluggish recovery from recession in Europe, and the recent food safety scare in China where a supplier was caught on hidden camera using meat that had fallen on the floor and had passed its expiration date.
Ever try the Arch Deluxe? Me neither.
This is not the first time the Golden Arches has faced such challenges, however. About ten years ago McDonald's found itself in a similar situation. Same-store sales were falling, the stock price was down, and the company was surrounded by negative media attention from books including Fast Food Nation. Franchisees were even leaving the company, a rare development for what was once a heavily coveted business opportunity. It seemed that the Golden Arches was on an irreversible decline.
From January 1999 to January 2003, the company's stock price fell by nearly two thirds, down to $14, as comparable sales dropped 1.3% in 2001 and another 2.1% in 2002.
The undisputed fast food king was shaken; it's crown was wobbling. However, that all changed with a transition in leadership. In December 2002, the board ousted CEO Jack Greenberg who had driven the stock down by losing focus on the core business. Greenberg introduced over 40 menu items, none of which took off, and invested in smaller restaurant chains, such as Chipotle and Boston Market, none of which had the scale to deliver meaningful returns. While Greenberg took the business in other directions, service and quality ratings fell as customers looked elsewhere for a quick meal.
Clearly, something needed to change. In the beginning of 2003, Vice Chairman Jim Skinner and the rest of the executive management team came up with a new strategy called Plan to Win. The plan was simple. Instead of expansion, the company would focus on rebuilding the foundation, delivering better food and service in a more appealing environment. 2003 got off to a rough start as sales continued to fall, but as the plan took shape customers came back and comps rose 2.4% that year. Skinner rose to the CEO post in 2004, and the rest was hamburger history. The company hardly flinched during the recession, posting positive comps in every month he was at the helm as the stock price tripled under his tenure, which ended in 2012, and its annual dividend payout soared from $0.55 to $2.80.
Back to the future
CEO Don Thompson, who took the reins from Skinner in July 2012, hasn't been so lucky. McDonald's saw its first monthly drop in comps in nearly ten years in November 2012, and recent numbers have been worse. As sales have stagnated, Thompson and company have taken an approach seemingly the opposite of the Plan to Win as McDonald's has been toying with all sorts of ideas to restore growth, lacking a coherent strategy.
The company recently filed to trademark the name "McBrunch," and though it has not given any acknowledgement of adding a new meal daypart, some analysts speculate it could mean an expanded breakfast menu by as late as 1 PM. Elsewhere, McDonald's is asking customers to give them their next hit burger as it's allowing consumers in four California locations to customize their burgers with fancier toppings such as guacamole and caramelized onions. Finally, in another attempt to drive morning traffic, McDonald's is again offering free coffee for the last two weeks of September, and said it will begin selling bagged coffee in grocery stores next year.
While those additions could add incremental sales, they seem to be getting away from the McDonald's brand and core offerings. Facing many challenges, including fast casual competitors, healthier eating habits, and line workers fighting for a $15 hourly wage, perhaps the company needs to adapt. However, playing in the coffee game or the fast casual market is not its strong suit, and McDonald's knows it.
The company best summed up its prospects at home in a recent press release, blaming "sluggish industry growth in a highly competitive marketplace." That statement comes in spite of standout growth recently by Chipotle, Starbucks, and other competitors, and amounts to making excuses.
What McDonald's really needs is a cohesive strategy that will make the brand attractive once again. Anybody still got Jim Skinner's number?
