McDonald's (MCD 0.40%) has been struggling to revamp and grow for the past few years, to no avail. Both sales and earnings growth for the past five years have been meager, coming in at less than 4% a year for each. This year is shaping up to be no different for the iconic fast-food chain, as comparable-store sales fell, according to second-quarter earnings results released recently.
But let's not pick on just McDonald's. The old and well-established portion of the fast-food industry in general has been under siege for quite a while. For millions of people across the country, films like Supersize Me, Food, Inc., and other documentaries decrying our food supply are still fresh in mind and the food industry has been rapidly changing. I believe the proliferation of fast-casual dining experiences touting fresher, healthier, or more upscale fare in recent years -- think Chipotle (CMG +0.97%), Panera Bread (PNRA +0.00%), Shake Shack (SHAK +2.10%), or even Starbucks (SBUX +1.02%) -- is proof positive of the changing consumer tastes in America that are hurting McDonald's and other well-established brands. The growth of the fast-food drive-up window has topped out, and many consumers are looking elsewhere for "all-natural," "premium," and "fresh" eating-out options.
Source: McDonald's.ca.
Is there any hope that McDonald's can recharge its growth? What can the company do to revitalize its business and reclaim its dominance of the fast-food empire? I see potential for success in two main strategies: reaffirming and embracing the business model that has historically worked well, and innovating the industry rather than imitating it.
Stick to your guns
McDonald's has attempted to increase sales, both overall and on a same-store basis, by flooding its menu with fresher and healthier food choices and more expensive burger options. This represents an attempt to capitalize on changing tastes and consumer preferences. The problem is dealing with its reputation. McDonald's has long been known for Big Macs and fries, not healthy or premium food selections. McDonald's is the go-to place for a quick, convenient, and affordable meal or snack, not for a superior or healthy dining experience. The company is attempting to change this perception, but it's had limited success.
Does that mean the old business model is dead for McDonald's? Hardly. There's still a place in the world for the quick and cheap fast-food stop-off, and there's no reason McDonald's can't continue to fill that niche with its burgers, fries, and other fare. My suggestion is that the company is getting distracted from what it does best. I would rather see bottom-line growth come from a reaffirmation of the simple model that got McDonald's where it is in the first place, than McDonald's attempt to play catch-up with fast-casual burger joints.
And there's another way McDonald's can continue to grow and stay relevant in the face of changing consumer habits. In fact, the company's track record shows that it has the ability to do so.
Buy success
McDonald's may continue to struggle trying to remake its brand and image in the fashion of newer upstarts. I'd rather see the company transform its business through key acquisitions going forward.
The company has already tried this approach. Remember when McDonald's decided to divest itself of its Chipotle holdings back in 2006, a position it originally acquired in 1998? At the time it decided to sell off its 8-year-old investment, Chipotle had over 500 restaurants and fetched McDonald's about $1.5 billion. Today, Chipotle has a market cap of some $23 billion and about 1,800 locations.
My point in bringing this up is not to rehash what turned out to be a corporate mistake, but to demonstrate how I believe the world's largest hamburger joint can right the ship. The restaurant industry is experiencing fierce competition, and sooner or later, it will become ripe for a consolidation phase in which some players will either go by the wayside or be acquired by competitors. I believe McDonald's can benefit by sticking to and strengthening its core business model (the cheap, quick hamburger meal), and strategically acquiring competition in segments of the industry it could expand into (casual-burger places or burrito joints, as an example).
Here are some key financial figures taken from the company's 2014 annual report:
|
Metric |
Amount |
|---|---|
|
Annual gross revenue |
$27.441 billion |
|
Annual net income |
$4.758 billion |
|
Total assets |
$34.281 billion |
|
Total debt |
$14.990 billion |
|
Annual diluted earnings per share |
$4.82 |
|
Amount of retained earnings per share (not paid out in dividends) |
$1.54 |
Source: McDonald's 2014 annual report.
The company certainly has the financial wherewithal to experiment within the industry, as it did with the Chipotle investment. McDonald's could become a parent company to a stable of brands that retain their own name and culture. An example of a company that has successfully executed this strategy is Disney.
Instead of assigning Mickey Mouse to be a sports commentator, bestowing him with superhero powers, or equipping him with a light saber, Disney added ESPN, Marvel, and Lucasfilm while staying the course with the core business. McDonald's could look to purchase a growing fast-casual burger joint, which would not be too far a stretch from the current hamburger model McDonald's currently runs, but could help it expand into a dining experience that it has not successfully achieved with their current brand.
A lesson for other brands facing change
I think McDonald's will not only survive but will also find a way to thrive in the competitive landscape of the restaurant industry. With a healthy balance sheet, stable revenues and earnings, and a well-entrenched brand, the company is poised to capitalize on the changes in consumer preferences. Other businesses that are facing rapid change can learn a lesson as well. While keeping a core model that's still working true to its roots, the company is in a good position to explore other opportunities elsewhere that could become the next big thing.
