In the not-so-distant past, McDonald's (NYSE: MCD) was a bumbling giant that seemed to have forgotten the recipe to its own Big Mac. Whether it was the failed ArchDeluxe line or falling short of the expectations in cleanliness and service that Ray Kroc initially instilled in the company, there wasn't much golden about the arches.
No surprise that turning the fast-food chain into a Best Stock for 2008 pick centered around a renewed focus on what made the company great to begin with. We don't stop at McDonald's because it has the best food in town, but we do expect a hot meal served promptly by friendly employees in a clean dining room -- all for less than $5, if we can help it.
Coffee causing nervous twitches
Why, then, with this company bringing their A-game these days, am I nervous about the impending national rollout of coffee bars in McDonald's restaurants? Perhaps it's that familiar gut feeling that management is chasing the dollar signs of a burgeoning coffee industry, or trying to kick Starbucks (Nasdaq: SBUX) when it's down, more than focusing on what customers want.
I was reassured by last week's conference call at the Cowen and Company Consumer Conference.
Value meal diners have perked up to a latte or cappuccino in test markets for two years now, so this clearly isn't an impulsive decision by management. More than 800 restaurants now serve frothy coffee drinks and, according to McDonald's CFO Pete Bensen, they've proven successful enough without affecting service times and quality for the standard sandwich fare, evidence that has reassured skeptical franchisers.
As a shareholder, extensive consumer research is what I hoped to see, confirming that the demand is there, and McDonald's can meet that demand without sacrificing other daily operations. Granted, it might be nearly two years before you see a McBarista in your neighborhood, as the national rollout is aimed for completion by late 2009.
Better, not just bigger
I noticed the mantra of being "better, not just bigger" used twice in the call. With realistic growth expectations of 3% to 5% for revenue and 6% to 7% for operating income, along with measured restaurant openings in promising markets such as Russian, China, and India, it's clear that long-term success is more important for McDonald's rather than swooping in on these markets for short-term rapid growth today.
So instead of flooding potential emerging markets with Golden Arches, McDonald's is striving to establish a brand carefully and plans on opening only 30-40 new restaurants in Russia this year, plus 125 in China. This may pale in comparison to the 400 openings Yum! Brands (NYSE: YUM) will see in China this year, but I'll take a small number of quality openings over a large number that looks good on paper any day.
If the "better, not just bigger" mantra is driving the push into specialty coffee drinks, then I do feel better about the success of this plan. And looking forward to ordering a McLatte.
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