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McDonald's Is Having a Fire Sale. Leftovers, Anyone?

By Nickey Friedman – Mar 13, 2014 at 6:00PM

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The company's troubles are reminiscent of J.C. Penney and Yum! Brands.

Source: McDonald's.

Now serving, for a limited time, Mighty Wings from McDonald's (MCD 1.18%)! Oh wait, we've seen this movie before, haven't we? Well, get ready for the sequel, and let's hope it's not titled Freezer Burn. In response to being stuck with 10 million pounds of Mighty Wings after its failed  promotion, McDonald's is back with leftovers at a discount.

The clearance rack
The whole thing is a bit sad. McDonald's is clearing the corporate freezer by slashing prices on its Mighty Wings by 40%, from around $1.00 each to $0.60 a piece. McDonald's has to try something. It is quickly starting to resemble J.C. Penney (JCPN.Q) and Yum! Brands (YUM 0.34%).

In the third quarter, J.C. Penney saw its same-store sales drop by a painful 11.9%. The company was stuck with a bunch of unsold inventory built up over two to three quarters. Its response and solution was to cut prices down so cheap that in many cases J.C. Penney was actually selling inventory for less than what it paid. The result was that same-store sales for the month of October turned very slightly positive, which made for a great headline even though the retailer was making little to no money on the additional sales.

Yum! Brands' KFC China serves as a more directly relevant example. With a poultry scare in China, its same-store sales plummeted, down 11% in the third quarter. Yum! Brands responded the following November by cutting prices in half for 10 days for its chicken buckets. It worked. The company was able to squeeze out a 1% gain in same-store sales for the month, as it was able to pawn off leftovers.

Source: McDonald's.

Abandoned chicken
The difference here, though, between the Mighty Wings problem and the Yum! Brands and J.C. Penney problems is that there is a permanent problem with the Wings. The poultry problem is temporary and is more of an image problem related to the bird flu scare and antibiotics in the supply chain rather than a permanent problem as to the quality of Yum! Brands' products. Likewise, the main problem for J.C. Penney is a lack of foot traffic through the doors. The products themselves aren't something that people have a severe dislike for.

The Mighty Wings, however, failed for a number of reported reasons. Franchisees complained they were too expensive. Customers complained they were too spicy. Others complained that they looked too much like the McNuggets. One report, by yours truly, complained that the Wings didn't come with blue cheese. According to at least one worker, "everybody" was asking for blue cheese. To a large extent, the problem seems to be with the wings themselves.

Now McDonald's is moving ahead, pushing the wings again on customers and franchisees who don't really want them. Well, the restaurant chain may not have much of a choice considering the huge amount of leftovers.

Usually, McDonald's limited-time offers such as the McRib sandwich or the Monopoly game are met with exciting promotions announcing "They're back!" Not so with the Mighty Wings.  Instead of saying with excitement that they have returned, the marketing focuses on a "Get them while they last!" tactic.  It's obvious they'll be discontinued. 

The questions become: What will this potentially do to its brand image? And is the price point now cheap enough to bring additional traffic into the stores, or will it just cannibalize other items on the menu?

Source: McDonald's.

Breakfast threat
Speaking of Yum! Brands, while McDonald's is busy recycling its spicy appetizer, Taco Bell is ready to move into breakfast with a full slate of innovative menu items such as the Waffle Taco, Crunchwrap, Breakfast Burrito, and the A.M. Grilled Taco. With this approach, Yum! hopes to take market share from McDonald's, share that McDonald's cannot afford to lose. Currently, 25% of its business is breakfast, while it dominates the quick-service breakfast hours with 30% market share.

Look for McDonald's to maybe show a turnaround in domestic same-store sales following the limited-time promotion. If so, however, take it with a grain of salt. Fools shouldn't be fooled that it's evidence of a real turnaround. Look for additional clues in further months from McDonald's before you declare its footing is solid again.

Nickey Friedman has no position in any stocks mentioned. The Motley Fool recommends and owns shares of McDonald's. 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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