The fire in the kitchen isn't the only heat McDonald's (NYSE:MCD) is feeling right now. Employees and consumers are protesting entry wages, marketing strategies, and corporate pay packages . McDonald's' newest competitor, Chipotle (NYSE:CMG), boasted a 24.4% increase in first quarter sales compared to the prior year period . And Yum! Brands' (NYSE:YUM) new breakfast items are proving to be lucrative in a market traditionally cornered by McDonald's .
The combination of these problems resulted in disappointing domestic same-store sales for McDonald's . The first quarter of 2014 saw investors shying away from this once-reliable company. But wait--is McDonald's really poised for a permanent downturn?
McDonald's is now showing promise for the future after a rough 2013. For example, McDonald's' shares hit an all-time intraday high in the third week of May, while Chipotle's shares dropped since hitting a record high earlier in the year . Despite the uncertainty surrounding Mickey D's, there are four simple ways the company can continue to trend upwards.
McDonald's was built on the concept of quick service. The McDonald's Brothers introduced the "Speedee Service System" in the late 1940's, and the rest is history. Unlike Chipotle, McDonald's offers drive-thru service at the majority of its locations. Furthermore, McDonald's opens earlier and stays open later than its fast-casual competitors.
Signs point to the company taking steps to increase the level of convenience offered to customers. In 2013, McDonald's extended hours in many restaurants and worked extensively on improving the efficiency of its drive-thru service . Convenience was developed further through the establishment of dessert kiosks and delivery service. This higher level of convenience is a major competitive advantage for McDonald's.
Cash cow offerings
McDonald's' most famous products, such as the Big Mac, comprise 40% of the company's revenue . Some would call for McDonald's to further diversify its menu in order to raise the revenue of non-traditional items. However, McDonald's should do the opposite. Look at the menu of Chipotle; it's simple, with a smaller range of options. McDonald's should follow suit and push its popular cash cow offerings instead of diversifying the menu, especially after diversification proved devastating in 2013.
Remember the Mighty Wings? That venture resulted in a surplus of $10 million worth of unsold wings . Or the Fish McBites? This item was pulled from the menu only months after its roll out . In these cases, menu diversification contributed to losses in sales and consumer confidence.
Plans to chase Taco Bell in diversification efforts could prove costly. Taco Bell's entry into the breakfast market is different than McDonald's' recent diversification. New breakfast items, like the Waffle Taco, directly compete with McDonald's in a market where Taco Bell previously had no presence. Recent failure in McDonald's' product innovation shows consumers prefer pre-existing items to its new ones. Therefore, McDonald's should focus on marketing its most profitable and well-known items.
McDonald's boasts over 35,000 locations in more than 100 countries. In 2013 alone, it opened over 1,200 new restaurants worldwide . In comparison, Chipotle has 1,588 restaurants in only five countries, and Yum! Brands has over 40,000 restaurants in more than 125 countries. While it does not offer as much accessibility as Yum! Brands, McDonald's was recently named Brand Z's most valuable global non-tech brand. The combination of McDonald's' unmatched global accessibility and familiarity creates an opportunity to increase store traffic. The more people that are exposed to McDonald's and its brand, the more potential sales McDonald's can make. While domestic performance is sub-par, increasing expansion positively influenced global sales.
Domestic same-store sales flat-lined in April, but global same-store sales rose 1.6 %. In Asia, the Middle East, and Africa – the company's fastest-expanding regions-same-store sales increased by 2.9 %. McDonald's has an advantage in the global market, even if sales in the U.S. are not meeting expectations. Further expansion, both in the U.S. and abroad, should continue to increase sales.
One reason fast-casual restaurants are beating out McDonald's is because of healthier and more ethical meal options . However, these restaurants also offer high connectivity with customers through restaurant atmosphere. For example, Chipotle's décor of stylized architecture and distinctive art makes customers feel like they are not eating in a fast-food restaurant. In order to attract customers with more than its value offerings, McDonald's must improve its emotional engagement with customers.
McDonald's' recent focus on social media and reimagined mascots are misplaced first steps. The best step McDonald's can take in building emotional engagement with the customer is reimaging restaurants. Instead of the usual plastic tables and primary colors, restaurants should reflect regional values and traditions in an upscale atmosphere. This change is starting to take hold in China, and should soon move over to the U.S. Though McDonald's plans to update 300 restaurants in 2014 , this is not enough. Large-scale atmosphere change is needed.
In order to catch up to its competition, McDonald's must take advantage of pre-existing consumer perceptions. Of course McDonald's is not a high growth stock, but smart business decisions could reinforce its long-term value. With continued focus on convenience, cash cow products, global expansion, and atmosphere refurbishment, McDonald's may be able overcome the year's early troubles of protests and sub-par sales.
Jared Billings 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. 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.