Don't buy into all the love that McDonald's (NYSE:MCD) is trying to spread. There are some deep-rooted problems that keep this burger restaurant from being a stock investors will want to buy.
McDonald's big Super Bowl ad reveal was that it would allow randomly chosen customers to pay for their orders with hugs, high-fives, and selfies, building on the "I'm Lovin' It" campaign that began over 10 years ago. According to Ace Metrix, the spot was one of the highest-scoring Super Bowl ads of all time and ranked 21% higher than what is usual for quick-service restaurants.
Unfortunately, such saccharine-sweet displays of affection won't change why customers have abandoned the chain for better-burger shops such as In-N-Out Burger, The Habit (NASDAQ:HABT), and the recently IPO'd Shake Shack (NYSE:SHAK).
Some of the biggest complaints people have about McDonald's are:
- The quality of its food
- Its healthfulness
- Where ingredients are sourced
- The wages it pays
Getting customers to call mom and telling her she's loved is fine, but it won't change public perception about the food.
Systemwide sales at McDonald's U.S. restaurants fell in 2014 for the first time in 30 years, and comparable-store sales have dropped for five straight quarters. The lovin' isn't lacking among its customers, it's with the chain itself.
Food quality concerns
McDonald's recognizes this is a problem. Last October it began a rather risky campaign to address questions people have about McDonald's food.
Called "Our food. Your questions," the burger joint program directly answered such burning questions as whether it uses "pink slime" in its burgers (no), what exactly is in a Chicken McNugget (white meat chicken), and whether it uses freshly cracked eggs (yes).
Previous McDonald's media campaigns had a way of going awry, and asking whether "yoga mat" chemicals are part of the manufacturing process (no, they're not) runs the risk of derailing the conversation. While it's too early to say whether the effort is a success, it ought to at least help alleviate the worst misconceptions people hold about the restaurant's food.
And yet Fatburger is successful
Dispelling myths about the health of fast food won't be as easy, however, since those concerns are rooted in fact even if the problem stretches beyond McDonald's.
The Centers for Disease Control and Prevention says that more than one-third of U.S. adults are obese; that's 78.6 million people. It estimates the annual medical cost of obesity is $147 billion in 2008 U.S. dollars. Highly processed foods like those served at McDonald's are of lower quality than eating servings of fruits and vegetables, and are thought to be a big contributor to our societal weight problems. Heck, even McDonald's warned its own employees about the dangers of eating fast food.
The difficulty for the burger palace is that its customers really don't want healthy food when they pull up to the drive-thru. Prior efforts to add such options to the menu, such as the McLean Deluxe and McSalad Shakers, failed (though one wonders how the Bacon Bacon McBacon -- an Australian market item -- never caught on).
Growth isn't as sustainable as its sourcing
McDonald's has a long-term commitment to follow sustainable sourcing practices across its company, or what it calls the three E's: ethics, environmental responsibility, and economic viability.
The problem for some people is this commitment is perhaps too long range. For example, McDonald's acknowledged that coffee bean farming practices have subjected the farmers to low incomes over many years, and said it is "committed to responsible coffee sourcing," but in 2012 only 25% of its coffee bean purchases were from sustainability certified sources.
And where genetically modified organisms are a growing concern for many, the burger chain admits it sources its beef from farmers who feed their livestock grains like corn and soybean that are over 90% GMO.
Taking care of business
McDonald's is not alone in feeling the wrath of activists wanting to raise the minimum wage to $15 per hour, as most fast-food restaurants are targeted. However, as one of the largest chains (with over 14,000 restaurants in the U.S. alone), it becomes the face of the industry.
Yet flipping burgers was never meant to be the main source of income for a family. Instead, it has been a stepping stone to a better job and pay, so it's not fair to blame McDonald's for an economy that has driven wage earners to its restaurants to work. Still McDonald's is seen as actually paying its employees better than either Burger King (UNKNOWN:BKW.DL) or Wendy's (NASDAQ:WEN), even if it's not up to the standards sought by the activists.
Changing your reality
As is often the case, perception is reality, so to some degree it does not matter whether McDonald's deserves all the scorn being heaped on it.
McDonald's has many irons in the fire right now, however, as it works to change some of those perceptions. But the recently announced resignation of CEO Donald Thompson creates a further air of uncertainty and another level of distraction.
Feel-good commercials in which you high-five the cashier and get your order for free will help spread the love, but it's not going to change how people think about the burger chain, and that means investors should remain cautious before giving McDonald's stock any lovin'.