It has not been a good year for McDonald's Corporation (NYSE: MCD). The company has seen traffic fall in the United States, as fast-casual competitors are eating McDonald's lunch, thanks to better reputations for food quality. McDonald's public image has taken a significant hit, as consumers take a harsher view of fast food, and its fundamentals are clearly being affected.
As a result, McDonald's stock has gone nowhere for an extended period. Shares of the fast food giant are down 1% over the past two years. But at long last, McDonald's may finally have a catalyst to fuel its turnaround: breakfast. Here's why McDonald's big breakfast changes could be just the spark it needs.
Source: http://news.mcdonalds.com/Corporate/Multimedia-Library/Menu-Items/Breakfast
Making breakfast better
The first change McDonald's is making to its breakfast is to improve the quality of its ingredients. McDonald's recently announced it will move from margarine to real butter in its breakfast items, including its English muffins, bagels, and biscuits. The move appears to be part of a broader push to shore up McDonald's image, especially in light of the success its fast-casual counterparts are having by emphasizing fresh food with real, high-quality ingredients.
The second, and more important change, is the much-anticipated move to all-day breakfast. The full switch is officially set for October 6. This is a big deal for McDonald's because it represents a true growth opportunity that the company desperately needs. According to a survey by brand perception researcher YouGov BrandIndex, McDonald's is the top choice for consumers who eat breakfast foods multiple times per day.
Various media reports indicate McDonald's is hoping the move will meaningfully increase traffic. According to a recent article from Reuters, McDonald's has notified franchisees it expects the move to all-day breakfast will result in an additional 200 customers coming into each restaurant per week.
Declining customer traffic has been a big problem for McDonald's this year, and a key source of its problems.
Could the changes reignite growth?
McDonald's needs something to move the needle in the worst way. Its global comparable sales, which measures sales at restaurants open at least one year, fell 0.7% last quarter, year over year. Total revenue and earnings per share each declined 10% year over year. Even excluding the effects of the strengthening U.S. dollar, McDonald's results are weak. Currency-neutral revenue and EPS are flat and down 11%, respectively, over the first half of 2015.
Traffic is a key issue weighing on McDonald's. The company stated in its last earnings report that global comparable sales declined mostly because traffic fell across all major geographic segments. As a result, the challenge at hand is to get more customers through the door, and all-day breakfast could do just that. McDonald's enjoys a high reputation in breakfast, and unlike lunch, its competitors haven't yet caught up. McDonald's CEO Steve Easterbrook stated on the last conference call that in the United States, the company saw above-average traffic in the Midwest, due in part to a heavier breakfast focus.
The Foolish bottom line
McDonald's problems these days are well-known. Revenue and earnings are in decline, as traffic continues to decline. One key part of McDonald's turnaround will be getting customers back through the doors, which will likely result in higher sales.
The move to all-day breakfast, along with the improvement in quality of ingredients, could finally bring back customers who have flocked to McDonald's competitors. If that comes to pass, McDonald's may finally turn things around.
