Why Investing in McDonald's Should Not Be on Your Menu

Sales figures say that customers are turning away, as should investors.

Joseph Wilborn
Joseph Wilborn
Apr 29, 2014 at 2:36PM
Consumer Goods

McDonald's (NYSE:MCD) posted its first quarter report last Tuesday. Its sales figures give us an indication that  this is not the best time to invest in McDonald's.

Don't blame the weather...well, not completely
The first quarter report cited severe winter weather as a key reason for why domestic sales were down 1.7% and operating income dropped 3%.

However, while the unusually rough winter no doubt played a part, it can't be held entirely responsible. Forbes quoted ITG Investment research analyst Steve West as saying, "You look at Chipotle's (NYSE:CMG) numbers and ask why didn't weather affect them?"

He was referencing the fact that Chipotle posted a 13% increase in U.S. comparable store sales during its first quarter.

The menu that doesn't end
West went on to cite menu choice as a key reason for Chipotle's rise and McDonald's drop. He was talking specifically about Chipotle's appeal to customers with healthy items, but his remark takes on added significance when you consider the following statement from McDonald's first quarter report: "Looking ahead, the U.S. remains focused on improving the restaurant experience through a continued commitment to operations and service excellence, customer engagement and menu choice to drive sales and profitability."

That reference to service and menu choices echoes what chief operating officer Tim Fenton said months ago during the conference call for the 2013 fourth quarter report when he stated, "We need to do fewer products with better execution."

The Wall Street Journal reported that McDonald's executives said during that conference call that the McDonald's menu had gotten too large for the outlets to function efficiently. The restaurants couldn't serve the customers in a timely manner.

So, the latest quarterly report indicates that the problem has not been rectified, and that McDonald's is still trying to correct its customer service.

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Meanwhile, the competition keeps scoring
In comparison, Burger King (UNKNOWN:BKW.DL) gets praise from analysts for keeping a simple menu, adding principally only items that will create buzz in the marketplace— items such as the reduced-fat Satisfries, which according to a Burger King press release from March 2014, is now the standard fries in its kid's meals.

Burger King CEO Daniel Schwartz said in a company statement, "In North America our focus on launching fewer more impactful products helped drive improved sales trends as the year progressed." Schwartz was referring to Burger King's fourth quarter net income, which rose 37%.

Other rivals beside Burger King are also scoring points with customers at McDonald's expense. After Yum! Brand's (NYSE:YUM) Taco Bell introduced its new breakfast menu starring the Waffle Taco, McDonald's was forced to respond with a two-week nationwide campaign of free breakfast coffee in an attempt to keep regular customers from sampling Taco Bell's morning menu.

The Associated Press reported that Taco Bell's longer breakfast period also has McDonald's considering stretching its own breakfast hours just to keep up. 

McDonald's was also feeling domestic pressure from Yum!'s KFC restaurants, and thus went directly after KFC by introducing Mighty Wings some time ago. However, the McDonald's chicken product wasn't a huge seller. Many analysts have pointed to the price being too steep as McDonald's wings were priced higher than those at KFC. So, with a considerable stock of unsold chicken on hand, McDonald's had no choice but to reduce the price during a recent lackluster campaign.

Things to consider
McDonald's is obviously still struggling to rein in its runaway menu. The company hopes that a more selective and focused approach to creating its menu will bring back U.S.customers.

The fact that the last two quarterly reports have highlighted the same problem indicates that fixing it is not an easy task. The problem could remain for some time. Meanwhile, disgruntled customers may switch to competitors such as Chipotle, Burger King, or Taco Bell.

The sales figures definitely tell investors that now is not the best time to invest in McDonald's.