Can three new quarter pounders save McDonald's?
Filed under: Investing
It's a sign that the chain is having to work hard to turn its declining fortunes around. So why has it fallen out of favour?
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StrategyAccording to the Nation's Restaurant News in the US, the burgers are being tested as part of the chain's strategy of boosting 'premium' burgers. It's hard to imagine it competing with the gourmet burger chains, but it's giving it a go with things like the Habanero Ranch, with white cheddar, hickory-smoked bacon and habanero-ranch sauce.
It is simultaneously working at the other end of the spectrum, on a range of cheap and cheerful menu items.
The tried and tested approach of serving burgers and fries seems fairly foolproof, so on the face if it it's hard to see why McDonald's is messing with a winning formula. However, there are some signs that this formula isn't winning quite as effectively as it once was.
ProblemsLast week saw a change of company president announced in the US, after it recorded its first US sales decline since 2003 (measured though monthly sales in the same stores rather than including new store openings). Separately, there have been noises out of the company that they can't expect growth to be phenomenal in the US given how saturated the market is.
McDonald's Chief Executive Don Thompson said in a statement:"We expect near-term top- and bottom-line growth to remain pressured as we focus on driving guest traffic and market share by leveraging our strategies and competitive advantages in response to the global economic, operating and competitive challenges. As we begin fourth quarter, October's global comparable sales are currently trending negative."
So what is going wrong?The problem is on a few levels. Perhaps most importantly the fact is that we're eating out less in the current environment. And while McDonald's is hardly the kind of brand where a meal feels like an investment, when you're watching every penny, the sandwich box from home starts to seem more appealing.
In the UK, we had an Olympic binge, which means these results were given a bit of a boost by the UK's junk food eaters. However, elsewhere in Europe, there were far fewer people going into the restaurants which saw takings fall. The company said: "In Europe, comparable sales declined 2.2% as positive results in the UK were offset by declines across many markets." It blamed a big part of this on "the segment's ongoing economic uncertainty."
Healthy?Then there's the issue of an increasingly educated public, who are more concerned about their health than ever. They know that McDonald's is advertising new healthier options, and is taking steps such as putting calories on the menu. However, they don't trust themselves to opt for a salad when they get in there, so they avoid it all together.
Finally, there's the issue of competition. Junk food is expanding, and in developed markets where we are already eating as much junk food as we can stomach, when a new chain opens, it takes customers away from the established players.
However, there is a bright spot on the horizon for junk food fans. The investment experts say that McDonald's will come through these dark times. Things only have to pick up a little for chains down the cheaper end of the spectrum to pick up.
At the same time, growth in emerging markets, and continual innovation, mean that something has got to stick. According to Market Watch in the US, on average the analysts recommend being overweight in McDonald's i.e. holding more of it than you would an average company... rather than eating too many of its fries.
But what do you think? Do you still go for fast food? What would encourage you to buy more? Will three new burgers tip the balance? Let us know in the comments.