Though it hasn't been a hip brand in many years, McDonald's (NYSE:MCD) has been an innovator that has steadily been able to bring customers in through new products, various pricing schemes, and contests. From the launch of the McNugget in 1983 to pioneering ideas like the Dollar Menu, the fast food chain was always able to remain relevant and even a little exciting to customers.
That, however, has changed recently as the company reported fewer people visited its restaurants in the fourth quarter with guest counts falling by 1.6% in the United States and 2% globally. "We've lost some of our customer relevance," CEO Don Thompson conceded last Thursday on a call with analysts. Thompson added that the chain will focus on faster service, offering better values, lessening wait times, and raising "awareness around McDonald's as a kitchen and a restaurant" that prepares high-quality food.
Slow service during peak times, partially caused by the chain's ever-expanding menu, is part of the problem. The main culprit, however, may be that despite adding egg whites for its breakfast sandwich and a line of "healthy" chicken wraps, customers do not perceive McDonald's as a place to eat healthy. Chief Operating Officer Tim Fenton said during the call that the new offerings had received a "muted response" from customers.
Can't blame the Hamburglar
The issue may be deeper than customers not believing that the addition of egg whites or even salads to the menu makes the restaurant (which once featured the bloated, purple monster Grimace as one of its mascots) healthy. Instead, the problem may be that in the incredibly crowded field of fast food and fast casual restaurants, it has become harder for new products to make a splash.
The arrival of the Chicken McNugget was not just a big deal for McDonald's, it was an actual news story. Now, even though McDonald's put a huge advertising push behind its Mighty Wings during the third and fourth quarters, the wings were less than mighty. According to a story on WSJ.com, the fast food chain ordered 50 million pounds of wings for the promotion and 10 million pounds remain unsold. The same article states that when McDonald's reported its third quarter earnings in late October, CEO Don Thompson said that the Mighty Wings promotion sold within the lower range of company expectations and admitted that the price "was not considered the most competitive."
Price may be a factor as the wings space is pretty competitive with Yum Brands' (NYSE:YUM) KFC as fast food competition and Buffalo Wild Wings (NASDAQ:BWLD) in the casual/fast casual space. Cost is likely not the driving force behind Mighty Wings' McFlop, however, or the company's larger struggles. Instead, McDonald's is suffering from a decline in the ability for gimmicks (aside from truly spectacular ones like IHOP's's annual "free pancake day") to move the customer needle.
Keep the cold side cool
It used to be news when McDonald's introduced a new product because not only were there fewer competitors in the 1980s and 1990s, there was also less innovation. The McRib, when it launched in 1982, was the first of its kind and it still gets media coverage today when the company brings it back. Even the McDLT, considered a giant failure because its styrofoam box was introduced right before environmentalists launched a backlash on that type of packaging , created a ton of buzz. Now, unless the chain launched Kitten McNuggets, it's hard to imagine that sandwich packaging could create a national uproar.
Hey, is that Gilligan?
In many ways, McDonald's in recent years has become like a sitcom that uses stunt casting. The first time, it's cool when Mr. T shows up for the Christmas episode. Unfortunately, you then need bigger stars to get the same reaction. Eventually, even if all four Beatles (even the dead ones) get back together, the audience is worn out. For decades, McDonald's has built part of its business strategy around product introductions and gimmicks. These efforts have had sputtering results in recent years, and none have changed the long-term success of the chain.
A new Mayor McCheese in town
Thompson is relatively new in the CEO chair, having only taken over 18 months ago. For him, these latest results may be a blessing in disguise. Instead of going for a quick fix through a new product that apes what works elsewhere (perhaps some sort of blue cheese, burrito, and frozen coffee hybrid), Thompson seems willing to look at the underlying problems with the McDonald's brand.
"The key is going to really be to reestablish the trust of customers," Thompson told investors on a conference call last week. "That means basic execution at a restaurant level, marketing engagement at a much stronger level, and also to make sure that our menu is relevant."
Of course, Thompson has some rope to play with despite the recent poor results. According to the New York Times, McDonald's "has about seven times the sales of Wendy's and Burger King combined." That gives the CEO the ability to not panic and be a little patient, sacrificing a few more quarters to make long-term changes instead of spending billions pushing the new Angus McRib Deluxe, or whatever other gimmick the company's test kitchens might be planning.
Fool contributor Daniel Kline has no position in any stocks mentioned. The Motley Fool recommends Buffalo Wild Wings, McDonald's, and Starbucks. The Motley Fool owns shares of Buffalo Wild Wings, McDonald's, and Starbucks. 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.
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