Should Investors “Flip Out” Over McDonald’s?

Evan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

McDonald's (NYSE: MCD) has just posted its first monthly sales decline in 9 years.  The burger giant has generally done well despite the recent recession and the ensuing anemic economic recovery, which has hurt many restaurant enterprises.  Now, things have changed.  This drop in sales begs the question:  Is this a sign of further trials for McDonald’s and the global economy as a whole, or is this something we shouldn’t be worried about just yet?  These questions will be answered by looking into two large causes of the McDonald’s sales drop, and whether or not this should be a major concern.

The first major reason why McDonald’s dropped last quarter was increasing competition from other businesses.  As the Los Angeles Times points out, McDonald’s might be getting too comfortable as the world’s largest fast-food restaurant chain.  Other competitors are ratcheting up their game plans, and McDonald’s is starting to feel the bite.  Some McDonald's rivals, such as Wendy's (NASDAQ: WEN) and Burger King (NYSE: BKW), are rethinking their overall business tactics and increasing spending on marketing.

Wendy's sales rose 2.8% in the third quarter.  The chain is decking out its restaurants with a new, sleeker look and has presented more appealing menu options.  Wendy’s and Burger King both have expanded their breakfast options, improved the coffees offered, and added salad menu items.

Burger King decided to get rid of their largely disliked monarch mascot and has given their stores a fresh new look.  Burger King has also revamped its menu items and has hired celebrity endorsers.  This strategy has so far proven to be beneficial for Burger King as global sales increased 1.4% in the third quarter of 2012.

The consumer sector ages 16 to 34 is a powerful factor that affects the restaurant marketplace.  This section of young people is often viewed as a pivotal engine of growth for fast-food companies.  Younger diners eat out more often and spend more money than older diners.

According to a November 2012 report from the Boston Consulting Group and customer research firm Service Management Group, young people go for fast-casual options, such as Panera Bread and Chipotle Mexican Grill. Chris Egan, a coauthor of the report, said, "Affordable fast-casual and fast-food restaurants with locally sourced goods, exotic flavors and service levels historically reserved for higher-quality restaurants will most likely garner a disproportionate share of millennial dining spending." Another analyst in the report, Mr. Setyan, said, "It's a fight for the same pie.  The competitors have wisened [sic] up a bit and they're all punching back, regaining the market share that McDonald's took from them."

The second reason why McDonald’s declined last quarter is because of the worsening global economic outlook.  Economic worries ranging from Greece’s woes and the European crisis to the looming, impeding “fiscal cliff” in the United States has taken a chunk out of McDonald’s profits.  Economic instability in the European market has hurt the company, as Europe comprises 40% of McDonald’s revenues.  Rising food costs and stubborn unemployment here in the US have also been thorns in the flesh of McDonald’s.

It can be argued that the Oak Brook, Illinois based company is a good indicator of where the global economy is currently headed.  In fact, as Fox News recently put it, “McDonald’s is the global economy.”  McDonald’s has 33,000 plus locations worldwide and over 400,000 employees on its payroll.  It has done very well in the past during times of recession because of its low-priced, easy to obtain food items.  It is a telling sign of the times seeing the largest, most enduring, hardy burger chain in the world having economic problems.

Is this decline something that investors should vex over just yet?  Not so fast.  This drop was certainly not unexpected, as analysts had forecasted.  This gave investors warning in advance that a drop was coming.  And, the drop was not a sharp decline.  In fact, the decline might not really be a decline at allForbes Magazine expertly opines on why we probably shouldn’t be panicking over McDonald’s just yet:

“Despite increased competition and an ugly global economic environment, McDonald’s remains best in class according to Morningstar analyst RJ Hottovy, who added the decline is essentially a consequence of a shorter reporting period this October…According to Hottovy, the decline is a consequence of “temporary rather than structural” trends and, really, shouldn’t be a decline at all.  The Morningstar analyst noted that the reporting period for October included one fewer Saturday, which accounts for approximately 200 basis points in global comparable sales, meaning they should’ve actually grown 0.2%.”

The bottom line:  Don’t “flip out” over the McDonald’s burger chain just yet.  Competitors are starting to improve and build their companies, so McDonald’s needs to continue to push to stay on top.  Although the global economic skies are darkening, and the fiscal cliff is looming, McDonald’s is in a position of strength to continue to do well both in the short term and in the long term.

 


EvanBuck has no positions in the stocks mentioned above. The Motley Fool owns shares of McDonald's. Motley Fool newsletter services recommend Burger King Worldwide and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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