What’s eating McDonald’s these days?


By Brittany Magee

Everyone seems to be making money on Wall Street except McDonald’s.

Over the past 12 months, McDonald’s shares have have gone nowhere, remaining unchanged, a disappointing performance in comparison to the Standard & Poor’s 500 index, which climbed 14.4 percent.

But why has McDonald’s stock stumbled?

After the past few quarters have left customers and Wall Street unsatisfied, the fast-food giant is flipping its strategy for the future, with hopes to be more appealing.

Once one of the best performers on the stock market, easily outpacing the S&P 500, even during the 2008-2009 recession, McDonald’s has drastically lost its footing over the past 12 months. The downturn reflects one-time events abroad and U.S. customers’ growing preference for healthier and fast-casual options.

These problems led the Golden Arches’ shares to began a sharp and steady decline early this summer. In October, its shares hit a 52-week low.

McDonald’s executives are aware of the trouble the company is in.

To combat further declines, the Oak Park, Ill.-based company plans to create a new consumer-centric experience for customers, deemed McDonald’s “Experience of the Future,” by revamping three key focus areas: taste, trust and convenience.

On one hand, the company doesn’t want to stray too far from its strong branded tradition that has fed generations for nearly 60 years worldwide. But these days it craves to remain relevant to the changing customer, especially in its priority markets in the U.S., Germany, Japan and Australia, by shaking up its menu, brand and digital presence.

Wall Street is waiting to be convinced.

“While we view each of these initiatives as appropriate, execution and timing remain questions, and investors should not expect an overnight turnaround,” said R.J. Hottovy, an analyst at Morningstar Inc., in an October note to clients. “We anticipate negative comparable sales trends to persist into 2015.”

In October, McDonald’s global sales at stores opened for more than a year fell for the fourth month in a row, sagging 0.5 percent, due in large part to the 4.2 percent decrease in sales in the Asia/Pacific, Middle East and Africa region. A July scandal at a Chinese meat supplier continues to affect customer confidence, driving down sales in recent months. Tensions between Russia and the West over the situation in Ukraine remain a problem for McDonald’s as well.

While global sales have been affected by one-time events as well as weakening economies in Europe and the Pacific Rim, investors see the happenings in China and Russia as temporary issues that the company will bounce back from. In fact, Russia reopened the first McDonald’s in Moscow last Wednesday after a nearly 90-day closure, but more remain shuttered.

As sales overseas suffer, McDonald’s faces challenges at home as well. Customers, especially millenials, who are choosing fast-casual restaurants over fast-food have slowed guest traffic at U.S. McDonald’s.

The company reported U.S. sales at stores opened more than a year edging down 1 percent in October, compared to the 4.1 percent decrease in September, the worst monthly results since February 2003.

“Although October results reflect our current business challenges, we are moving with a sense of urgency to improve the trajectory of our financial performance while taking the actions necessary to pursue the brand’s long-term potential,” said McDonald’s President and Chief Executive Officer Don Thompson earlier this month.

The “decline in the McDonald’s U.S. business” because of a slow in guest traffic was clearly a major problem for the company, noted Chief Financial Officer Pete Bensen in an Oct. 21 conference call.

Critics say the company is losing touch with its customers, especially millenials, as they are opting instead for fast-casual options such as, Chipotle Mexican Grill, Inc., Noodles & Company and Five Guys Burgers and Fries, because of customized ordering and fresher ingredients.

The fast-casual trend is gaining momentum: from 2012-2013, fast-casual sales in the U.S. rose 11.3 percent, while sales within the fast food industry, also referred to as the quick service segment, increased only 2.3 percent, based on data gathered by Technomic Inc., a Chicago-based research and consulting firm serving the food industry.

The slowing pace of McDonald’s improvements in key markets “has become a concern and indicates that McDonald’s brand equity may be under pressure amid industry promotional activity and fast-casual competition,” said Hottovy in an October note to clients.

In order to keep pace with growing competition and consumer trends, execs at the Golden Arches are pushing to implement the McDonald’s “Experience of the Future,” a concept aimed at delivering a more innovative, modern experience for customers, as quickly as possible. The initiative focuses on changes to its menu, brand and digital presence.

“Our near-aim goal is to move quickly on what will re-energize our sales and guest counts, as we continue to look ahead and work toward our significant long-term opportunities, to build even greater demand and drive sustained profitable growth,” Bensen said at the Morgan Stanley Global Consumer & Retail Conference last week.

First, while McDonald’s will stay committed to its core products, customers can expect to see some innovative items on the menu starting next year, including Create Your Taste and more locally-focused fare, according to McDonald’s executives. Create Your Tastes will allow customers to choose their own toppings for the Quarter Pounder patty, and the company will roll out more regionalized products, such as a chorizo burrito and mozzarella sticks, to better satisfy local tastes.

These menu revamps are intended to meet the “large societal trend for customization and personalization,” said Stephen Easterbrook, McDonald’s Chief Brand Officer at the Morgan Stanley conference.

Secondly, with more and more people caring about where their food comes from than ever before, McDonald’s wants to make sure it’s upfront about the quality and integrity of its supply chain, said Easterbrook.

In order to do so, the company launched Our Food, Your Questions campaign last month. It invites consumers to engage with McDonald’s through its website and social media and ask whatever questions they might have about the company; to create a dialog with the brand.

“We want to make sure that we are a transparent brand,” said McDonald’s President and Chief Executive Officer Don Thompson in an Oct. 21 conference call.

Lastly, McDonald’s wants to be relevant on the digital front, specifically to make ordering and payment easier for its customers. After launching Apple Pay, a mobile payment system utilizing the iPhone 6 and Apple Watch, in September, the company aims to introduce a global mobile app in the U.S. next year. The app will allow fast payment and offer promotions, followed by ordering and loyalty program capabilities, according to McDonald executives.

To help push these new initiatives through in the U.S., its most important market, Mike Anders took over as president of McDonald’s U.S.A., in August.

“It’s not a secret that McDonald’s has struggled in the last couple of years, especially in the U.S.,” said Morgan Stanley restaurant analyst, John Glass, at the Morgan Stanley conference last week. But, he said, the company is “starting with a strong brand with a lot of potential in the future.”