Sunday, September 21, 2014

12081: Five Fingers Of McDeath.


5 reasons McDonald’s is falling apart

By Rick Munarriz, The Motley Fool

Another month, another wave of customer defections at your local Mickey D’s. McDonald’s (MCD) posted another disappointing showing in terms of store-level sales for the month of August. U.S. comparable sales slipped 2.8% for the month, falling by an even harder 3.7% worldwide. McDonald’s stock hit a new 52-week low on the news.

These are lean times for the world’s largest burger flipper, especially closer to home, where comps have fallen in 9 of the past 10 months. Let’s explore some of the reasons for the rut that the fast food giant finds itself in at the moment.

1. Quality is a problem

McDonald’s has been trying to upgrade the quality of its food, realizing that fast casual chains that offer higher-end fare with the convenience of quick-service restaurants are growing at its expense. Unfortunately, its reputation for having crummy food even within its own category isn’t going away.

A Consumer Reports survey of more than 32,000 fast food fans ranked McDonald’s dead last among 21 leading burger chains based on taste. When’s the last time an entrenched consumer brand dramatically reshaped consumer perception of the quality of its grub? It won’t be easy for McDonald’s.

2. The growing menu is causing delays and prep mistakes

McDonald’s is no longer just about burgers and fries, but giving customers more choices also has its drawbacks. McDonald’s hosted a webcast with its franchisees last year, alerting them on growing number of customer complaints about employee unfriendliness.

What’s making customers so unhappy? Industry trade mag QSR puts out its Drive-Thru Performance Study every year, tracking transaction speeds. Last year, it found that the average McDonald’s customer’s wait increased to more than three minutes after placing an order to receive it. That’s worse than the industry average, and a personal worst for McDonald’s.

Connect the dots, and it’s easy to see why the more complicated menu at McDonald’s is doing more harm than good.

3. The world is no longer its oyster

It’s been a rough go for McDonald’s domestically, but it was holding up relatively better overseas until this summer. August has offered a double whammy of international setbacks as a supplier scare has decimated its traffic in China, while Russian regulators shut down several locations on food safety concerns that may ore may not have had political motivations.

In short, the same world that was once there for the taking is starting to turn on McDonald’s.

4. McDonald’s is being cast as “the bad guy”

It’s been a year since the Service Employees International Union launched the Fight for 15 protests, trying to get fast food chains to boost their minimum wage to $15. As the country’s largest burger chain, McDonald’s has become the poster child for the campaign.

The end result is that a lot of people think it’s not just the food that’s cheap at McDonald’s. It’s not entirely fair. As big as McDonald’s itself may be, 80% of the restaurants are owned by independent franchisees working on leaner markups. However, those siding with the union’s push to roughly double wages at McDonald’s may be avoiding the chain on principle, even as most of its burger peers are holding up better in terms of comps.

5. Going back to basics may not be on the table

A common argument is that McDonald’s just needs to return to its simple roots and the Dollar Menu emphasis that served it so well in its heyday. The problem is that it isn’t likely to work. If McDonald’s scrapped the fancy coffee drinks, premium chicken sandwiches, and gourmet burgers off of its menu, do you really think sales would increase? Outside of a likely improvement in speed of service, it would lose more customers than it would gain by going back to basics.

Yes, a place like Five Guys can thrive without adding shakes, desserts, or fancy sandwiches. The challenge is being able to retain popularity once you start to scale back an expanded menu. This is where McDonald’s finds itself today, seemingly in a winless situation.

The Motley Fool is a USA TODAY content partner offering financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.

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