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Is McDonald's Finally Making the Right Menu Moves?

By Keith Noonan – Mar 21, 2014 at 5:00PM

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The rise of fast-casual restaurants like Chipotle represents a growing threat to McDonald's. Are Ronald McDonald and company officials making the necessary adjustments to create future growth?

McDonald's (MCD 0.73%) has made a number of questionable menu decisions over the last several years. It has attempted to change its image and reshape the way its brand is perceived while moving into higher-margin products. Public health campaigns and the war against soda increasingly place McDonald's in the crosshairs.

The fast-food chain's efforts to carve out a bigger slice of the coffee market with its McCafe brand have seen mixed results. Meanwhile, its attempt to cash in on the popularity of chicken wings with Mighty Wings was largely disastrous. The recent introduction of the Bacon Clubhouse line could be a much better move. The company might fulfill a request that customers have been making for years. Is McDonald's finally taking the kind of steps necessary to maintain its position in the fast-food industry?

Uphill battle
McDonald's profitability is heavily dependent on margins generated from soda sales. Unfortunately for McDonald's, partner Coca-Cola, and others, North American soft-drink sales have been falling. McDonald's growth has been solid in Latin American and European markets, but in the US McDonald's is facing rising challenges from fast-casual restaurants like Chipotle Mexican Grill (CMG 0.31%) and Panera Bread. These companies are broadly perceived as being healthier and higher quality options offering comparable value.

McDonald's has attempted to court a more health-conscious consumer base with the introduction of salads and more options, such as the choice between fries and fruit in combo meals; this has done nothing to spur growth. The company's stock price hovers at year-ago levels despite efforts to expand its consumer base. That's bad news for a company that has routinely beat expectations and defied the odds over the last decade. In a year that saw the introduction of products like Fish McBites, McWraps, and Mighty Wings, the company experienced a sales decline of 1.4%.

The introduction of the Bacon Club could be McDonald's best menu move in years. The bacon craze may have peaked, but the pork product is still trendy. In fact, bacon is likely to capture consumer interest in a way that the much-advertised Mighty Wings clearly failed to do. McDonald's new bacon sandwiches require none of the exorbitant prep time that plagued the production of Mighty Wings. The company recently slashed prices on the wings in hopes of selling excess inventory.

More breakfast
The Bacon Clubhouse line represents both a return to familiar territory and an attempt to further the company's premium menu offerings. The new bacon sandwiches are likely a step in the right direction. But the most promising news to come out of McDonald's headquarters in the last year was that it is considering making its breakfast offerings an all-day affair.

Expanding breakfast into the full day would present challenges to franchisees, but McDonald's would be wise to do what it can to facilitate the change. As soda sales continue to deteriorate, McDonald's has a clear interest in promoting similarly high-margin coffee sales. Its breakfast foods create much more natural pairings with coffee than the burgers, fries, and chicken products that populate the post-10:30 a.m. menu. The company could greatly strengthen its McCafe brand if it chooses to implement an all-day breakfast menu.

Chipotle is shaking up the restaurant industry
Chipotle, once a subsidiary of McDonald's, has been riding high with more than 1,300% growth since its IPO more than eight years ago. Now it looks like Ronald McDonald and company must adapt to the growing presence Chipotle has in the restaurant business. Many have pointed to the customized nature of Chipotle's menu offerings as being central to the company's allure, and McDonald's could soon be following suit in this regard.

McDonald's should be careful not to continually ignore the reason consumers frequent its Golden Arches. Chipotle and other fast-casual restaurants represent a considerable threat to the McDonald's model; the company cannot stray too far from the elements that enabled it to become the world's biggest fast-food chain.

The most important customization McDonald's can make...
Premium menu offerings and customized options could work in McDonald's favor. But they also carry the risk of making the company's menu overly complicated and diluting the broader brand. McDonald's representatives have stated that they will focus on strengthening the core menu this year, but more same-store sales declines are anticipated. Extending its breakfast menu likely represents the company's best chance of achieving growth and preserving its relevance.

Keith Noonan has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and McDonald's. The Motley Fool owns shares of Chipotle Mexican Grill and 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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