Five Reasons McDonald's Is Struggling
There's no denying that McDonald's is slumping right now. Its global same-store sales fell 2.5 percent in July, its worst performance in a decade, and sales on the home front are actually worse. They fell 3.2 percent. The company's sales slump is now officially entering its third year.
Unlike Asia, where a food safety scare has trashed sales to the tune of a 7.3 percent decline, there is no one reason for McDonald's domestic slump. Sure, the company can point to the timing of a Monopoly promotion, and the end of the World Cup, for its sluggishness domestically in July. But there are other issues at work. Here are five things we think are causing problems:
Wendy's. Competition is heavy in the restaurant business. A lot of the focus as it relates to McDonald's has been on Burger King, which has made aggressive changes to compete more effectively against the burger giant. But Burger King's sales have been pedestrian dating back to 2012, when a bunch of new menu items and other issues led to strong sales improvement. The best competition on the burger front lately has come from Wendy's, which has bested McDonald's same-store sales number in six of the past eight quarters. And in the second quarter, Wendy's outdid McDonald's by 460 basis points. And then think of this: Wendy's still has to remodel the vast majority of its store base. Wendy's could outdo the arches for years.
Other competition is coming from Chick-fil-A, which has better unit volumes than McDonald's, fast-casual competitors and even gas stations and grocery stores that are aggressively stepping up their offerings. But when it comes to fast-food burger, our money is on Wendy's.
Tired remodels. McDonald's smartly overhauled its store base, which helped generate strong sales for more than a decade as its restaurants actually became good environments in which to have a meal. The problem, however, is that as a remodel program progresses, sales lifts from those improvements diminish. At this point, McDonald's has remodeled so many restaurants that it's no longer a novelty to eat in a newfangled McDonald's with flat screens and waterfalls. It's an expectation.
Menu complexity. We've talked about this before. But McDonald's has 145 items on its menu. Many of those items are tough to make. This increases service times—and if McDonald's is not fast, it's not much. There's plenty of evidence that McDonald's wants to improve on the speed front, by testing out 60-second drive-thru guarantees and adding new technology to the stores to improve throughput. Yet the item-heavy menu also diminishes the value of new offerings, because they get lost amid all of the other items. Menu complexity is one of the biggest complaints on the part of franchisees.
Few big hits. When was the last time a new product at McDonald's made a real splash? Can't remember? Neither can we. But we can remember some big failures. The Angus Burger line was supposed to provide the chain with the premium item it's long wanted. Nope. It got pulled off the menu because of a lack of interest from consumers when the company wasn't flooding the market with Angus ads. Then there was the spectacular Mighty Wings failure. Not long ago, McDonald's had been lauded for its ability to add sales by finding new products for its diners to love. Yet lately its efforts have fallen flat. Maybe this is a marketing failure. Or perhaps it's because the chain has so many products on its menu. Whatever the reason, it's a poor track record for a chain that relies on new products for sales growth.
Bad publicity. As the largest restaurant chain in the world, McDonald's is a big, easy target for critics of the industry and the health of its food offerings or its labor practices. It's always been able to withstand that criticism, and has often responded smartly to such complaints. But we can't help but wonder whether complaints about the pay level of fast-food workers are causing some people to opt against eating at McDonald's. The chain is under considerable pressure to improve pay—to the point that the National Labor Relations Board is practically rewriting franchise law. Consumers in the current, politically divided climate have shown a propensity for using their dollars to make a statement. It wouldn't surprise us if it's happening in this situation.
We didn't mention a few other reasons some would note for McDonald's struggles. But there is no one reason for the chain's struggles, and its loss of market share on its home turf. So there is no one solution.
"McD is clearly losing share in the US," wrote Jefferies Analyst Andy Barish, "and there's no silver bullet here."