McDonald's Corp. (MCD) is reportedly chopping off some menu items, evaluate its cooking methods and probably remove some ingredients, as the fast food chain tries to turn around declining comps in the U.S. In a recent investor meeting, the company announced that it will reduce waiting times for customers by simplifying menu portions and decreasing the number of Extra Value Meals from 16 to 11.
The quick service chain plans on reducing choices of certain items. This implies that the company will offer one Quarter Pounder with Cheese instead of four; one Premium Chicken sandwich instead of three; and one Snack Wrap instead of three. The simplified menu is already being tested in various outlets across the U.S.
Further, McDonald's has added customized ordering to meet the changing tastes of consumers. The company is betting big on its "Create Your Taste" initiative that lets people pick the buns, cheeses and topping for their burgers. McDonald's plans to launch this program in about 2,000 of its roughly 14,000 outlets in U.S. in 2015.
In our view, McDonald's with the menu customization initiative is looking to grab market share from the fast casual operators like Chipotle Mexican Grill, Inc. (CMG), which has made a name for itself in the restaurant industry with personalized menu options..
Additionally, the company is looking to cater to the heath-conscious customers who want to know about the ingredients and their origins. The company is looking at different cooking and holding procedures to enhance the appeal of its core items, while doing away with the preservatives. The company also plans to change its pricing structure to bridge the gap between its dollar, core and premium offerings.
Initiative to Boost Dwindling Sales?
We believe declining same-store sales, falling stock price and shrinking base of young customers have compelled the world's largest fast-food chain to take these initiatives. McDonald’s’ November comps decreased 4.6% in the U.S., far worse than analysts’ expectation of 1.9% drop and 1% decline in October.
In fact, global comps for November declined 2.2%, marking the sixth consecutive monthly decline, with the highest decline recorded in the domestic market. The decline compared unfavorably with 0.5% drop in October and the year-ago increase of 0.5%. Moreover, it was worse than analysts’ expectation of a decline of 1.7%.
Heightened competition and a few unwise decisions have slowed down service and are hurting comps in the domestic market. The introduction of too many items in 2013 has impacted service as well as orders.
The company has been losing customers to fast-casual chains that focus on just a few menu items. Moreover, competition has intensified with these fast-casual food chains providing healthier options and fresh ingredients compared to the processed food offered by McDonald’s.
Further, the company has been hit hard by the supplier scandal in China and Japan, which lowered comps in Asia in November. Also, Europe was hit by poor performance in Russia where the company is facing pressure from consumer safety regulators leading to temporary closure of restaurants. In addition, negative results in France and Germany hurt comps.
This Zacks Rank #4 (Sell) company is striving to enhance its marketing and simplify the menu options in order to survive in the current competitive environment. However, the company expects earnings for the fourth quarter of 2014 to be dampened by weak performance in all the regions.
Some better-ranked stocks in the restaurant industry include Bloomin' Brands, Inc. (BLMN) and Cracker Barrel Old Country Store, Inc. (CBRL). Both these stocks carry a Zacks Rank #2 (Buy).
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