The Quarter Pounder, an icon of the McDonald's (NYSE:MCD) menu, is getting a tasty upgrade. The fast food titan recently announced that by next year most of its 14,000 restaurants across the U.S. will be preparing the burger to order using fresh, not frozen beef.
The shift is part of the company's plan to reverse a sales slide that's seen it lose ground to rivals as customers demand food with fewer preservatives that are cooked using restaurant quality preparations.
McDonald's business is on the upswing right now. Sales at existing locations improved by nearly 3% last year to mark the Golden Arches' best global showing since 2011. The biggest contributor to that growth was a switch to all-day breakfast that helped push average guest spending higher. However, that shift provided just a one-time boost to the business, and Micky D's still endured a 2% drop in customer traffic in the U.S. segment in 2016, following a brutal 3% decline in the prior year.
Some of the slump can be tied to sluggish conditions in the broader industry. Yet, McDonald's is still faring worse than many of its fast-casual peers. Shake Shack (NYSE:SHAK) posted a 4% sales improvement last year as customer traffic edged higher by 1.1%. And Panera Bread (NASDAQ:PNRA) saw a slight uptick in its guest counts for the third consecutive year in 2016.
Catching up to rivals
These chains both credit their non-fast-food approach as being important to their success. Panera recently committed to remove all artificial additives from its menu items because, executives explained, "we think that simpler is better and we believe in serving food as it should be."
Shake Shack's entire brand focus involves applying restaurant-quality ingredients and preparations to a fast food setting. The 4-ounce patty that's the basis of its signature ShackBurger is the same size as McDonald's Quarter Pounder, only the company explains that it is made with "a proprietary whole-muscle blend of 100% all-natural, hormone and antibiotic-free Angus beef, ground fresh daily, cooked to order and served on a non-GMO potato bun."
It's probably no surprise, then, that one of McDonald's core growth goals is to regain many of the customers it lost to rivals like Shake Shack over the last few years. Executives dropped a healthy dose of honesty on investors on this topic last month. In their official global growth plan, they admitted that, "as customers' expectations increased, McDonald's simply didn't keep pace with them."
A few of the menu changes intended at bringing the company back in line with changing consumer tastes include moving to cage-free eggs and committing to using antibiotic-free chicken. The company also removed artificial preservatives from a few of its most popular menu items and cut high fructose corn syrup from its buns.
Can McDonald's get its groove back?
Investors have good reasons to expect higher direct returns from McDonald's shares over the next few years as its refranchising initiative raises cash and boosts profitability. Cost cuts should also push profit margins higher. Thanks to these two financial shifts, the fast food giant is in position to deliver as much as $8 billion in annual cash returns through dividends and stock repurchases in each of the next three fiscal years.
But the more important metric for its long-term business success is customer traffic. Unless Mickey D's can reconnect with a fast-food customer base that's becoming more focused on health and quality, then the growth rebound it achieved last year will be just a small blip in a long-term sales decline.
Executives are betting that upgrading the preparation of one of its staple burgers instead helps keep the fast food titan squarely within the mainstream of what customers are now demanding from quick-serve restaurants.