Why McDonald's Corporation Can't Keep Up With Chipotle Mexican Grill

McDonald's has fallen behind its faster-growing competitors. Here are a few things holding McDonald's back, and why Chipotle is getting it right.

Bob Ciura
Bob Ciura
Oct 29, 2014 at 8:00PM
Consumer Goods

By now, it's abundantly clear that McDonald's (NYSE:MCD) has a problem. Sales aren't just flat-lining, they're falling, and the problems aren't just contained to North America. Analysts and investors alike have known for some time that growth in North America would be hard to come by for McDonald's, since developed markets like the United States have a highly saturated fast-food environment and consumers are steadily adopting healthier eating habits.

But there are still eating establishments growing at high rates, proving that even developed markets can be a booming opportunity. The challenge, of course, is to get it right, and that's where McDonald's has failed. McDonald's embarked on a number of strategic initiatives over the past several years, which eventually fell flat. In that sense, its problems aren't an inevitable result of demographics, but rather are self-inflicted.

Here are the fundamental differences that allow Chipotle Mexican Grill (NYSE:CMG) to grow leaps and bounds ahead of McDonald's.

A flurry of problems
McDonald's has incurred a series of self-inflicted wounds over the past few years that have each contributed to its current woes. First was the decision to drastically expand its menu. McDonald's now has several dozen menu options to choose from. At the time this decision was made, it was theorized that more options would naturally mean more customers. Unfortunately, that was (small-f) foolish thinking. What's really happened is that McDonald's huge menu has slowed everything down. Customers are taking longer to make selections, and orders are taking longer to fill.

McDonald's reputation for customer service is on the decline, which has a real effect on traffic. Fast food is expected to be just that, and as McDonald's released more complex menu offerings, it suffered in its ability to complete orders in a timely manner. As fast-food industry publication QSR stated in its Drive-Thru Performance Study last year, McDonald's had sunk to its slowest average speed of service in the history of the survey, at just over three minutes.

At the same time, McDonald's bloated menu has caused its core menu options, namely burgers and fries, to suffer. McDonald's seems to be a Jack of all trades, master of none. In response, McDonald's tested a new initiative in select markets this summer. If customers didn't receive drive-thru orders in 60 seconds or less, they got a free item at a future visit. If nothing else, it's commendable that McDonald's is finally trying to make changes to address its slowing drive-thru performance.

Still, McDonald's has a long way to go to improve efficiency enough to restore growth. This is an area in which it can learn a lot from Chipotle.

Chipotle has mastered the art of efficiency
By contrast, Chipotle is thriving, and that's because it takes a markedly different approach than McDonald's. Chipotle offers a simple menu within the context of a streamlined ordering process. Customers make just a few key decisions with every order, and Chipotle workers complete orders in a process very similar to an assembly line. This reduces the likelihood of bottlenecks and maintains Chipotle's reputation for good service.

Chipotle's efficiency keeps a revolving-door type of atmosphere, and this efficiency has flowed through to Chipotle's financial performance. Chipotle produced a 28.8% restaurant operating margin last quarter, which was an increase of 200 basis points year over year. Comparable-restaurant sales, which measure sales at locations open at least one year, soared 19.8% last quarter. By comparison, McDonald's same-restaurant sales fell 3.3% year over year based on lower traffic across all operating segments.

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McDonald's is finally paying attention
Fortunately, not all is lost for McDonald's. Upon releasing its poor quarterly results, McDonald's stated its objectives going forward would be to simplify the menu that showcases its core products. In addition, McDonald's is going to revamp its marketing to highlight food quality. These strategies will take time to materialize, so investors need to have patience to stick with McDonald's. But it's important to give credit where credit is due, and at the very least, McDonald's is no longer content keeping its head in the sand and seeing its market share stolen away by the competition.