McDonald's (NYSE:MCD) menu might soon slim down. The company recently delivered a dud of a quarterly report, complicating the outlook for the fast-food giant. Profit dipped 30% year over year, and revenue dropped roughly 5% to $6.99 billion as global same-store sale fell 3.3%. These declines stemmed from increasingly strong competition, cultural headwinds, and unfavorable circumstances in foreign markets.
On the heels of its worrying quarterly results, the company announced that it will alter its menu and attempt to improve the experience provided at its restaurants. McDonald's pending menu changes arrive after years of franchisee complaints that offerings were overly complex and eschewed margins in favor of defensive strategies against encroaching competitors. Details on how the coming McDonald's menu will differ from the old haven't all been spelled out, but let's take a look at what the changes might mean for the company's ability to compete with rivals like Yum! Brands, Chipotle Mexican Grill (NYSE:CMG), and Buffalo Wild Wings?
McDonald's menu messaging is mighty confusing
Indications that the new McDonald's menu strategy would involve significant simplification efforts were paired with plans to increase specialty ordering and regionally based menu items. While cutting down on some of its more complex menu offerings would seem to provide a path to improved margins, meal customization and geographically specific products make the end results far less cut-and-dried.
Costs associated with the move to allow customers a greater degree of input on their orders should be partially offset by the introduction of touch-based ordering tablets, but more complex orders will likely translate to longer prep times. As for the push into regionally specific items, the introduction of the right products certainly could drive sales, but the basic tenets of scale suggest that margins could be reduced.
In reference to McDonald's menu and overall dining experience, CEO Don Thompson recently said that his company had not done an adequate job in keeping up with expectations. Changing standards are partially attributable to the rise of fast-casual chains such as Chipotle and Buffalo Wild Wings, and McDonald's handling of the new consumer trends looks to be crucial to its future.
After recently posting 20% quarterly growth, Chipotle announced that it expects sales growth to slow considerably next year, but that is more an indication of just how incredible its expansion rate has been than a tempering of unfavorable conditions for McDonald's.
A slimmer menu and regional offerings won't turn the tide
Not long ago, rumors circulated that McDonald's menu would expand to make its breakfast offerings available throughout the day. This speculation gestated as Yum! Brands' Taco Bell chain was in the early stages of challenging McDonald's breakfast dominance. A dramatic expansion of breakfast hours now looks unlikely. With one of McDonald's most important segments under increasing attack from a rival fast-food chain, and the fast-casual restaurants seriously complicating the value of the company's broader offerings, simply introducing a more focused menu strategy is probably not a path to long-term success.
McDonald's menu problems highlight a more serious issue facing the company: Its image is in the gutter, and the actions necessary to change this fact, at least in the short term, run counter to its corporate identity and business structure. The company built its empire by offering food that was thought to not only offer impressive value, but also an element of fun.
A quick look at the company's advertising and marketing efforts over the last year reveals just how badly McDonald's is hurting on these crucial fronts. This year alone has seen the introduction of a new international mascot for the Happy Meal, a new image for Ronald McDonald, and a series of videos that address some frequently circulated complaints and myths about its food. The company is on the defensive, and its attempts to shift consumer perceptions have yielded little benefit.
Is organic the answer?
Comments from Thompson suggest McDonald's might push to introduce a new line of organic products at its stores. While it is doubtful that such offerings would win over the company's more ardent detractors, they might improve public perception of the chain. A recent viral video invites viewers to giggle along as foodies give rave reviews to McDonald's menu items that they believe are from a new chain that specializes in organic fast food. Some of the critics go so far as to say that the sampled items far surpass what is served under the Golden Arches. To be sure, this video provides only anecdotal evidence, but it does illustrate the important relationship between perception and reality.
McDonald's menu reinvention must be supported on other fronts in order to be effective. In addition to taking a page out of Chipotle's book by offering greater customization and healthier ingredients, the company might also be wise to imitate Buffalo Wild Wings' push to add better, higher-paid employees as a means of improving service and the overall customer experience. Efforts in these areas could help make the company's advertising and marketing campaigns significantly more successful, though the timing and execution of a concerted makeover effort are crucial.
McDonald's faces the unenviable task of competing with the fast casuals, while also battling Taco Bell, Burger King, and Wendy's, so it doesn't look like its identity issues will be resolved anytime soon. In questionable shape and suffering fresh growing pains, McDonald's must walk the tightrope of serving disparate consumer segments in order to preserve its future.
Keith Noonan has no position in any stocks mentioned. The Motley Fool recommends Buffalo Wild Wings, Chipotle Mexican Grill, and McDonald's. The Motley Fool owns shares of Buffalo Wild Wings and 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.