It's Difficult to Beat This Fast Food Behemoth

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When the going gets tough, the tough get going. McDonald’s (NYSE: MCD) has proved this again. Despite deterrents like weak consumer spending across the globe and declines in restaurant visits in the U.S., Big Mac has proved that its strategies are working. After months of turmoil, it has reported positive comps across the globe in the U.S., Europe, and Asia. Let us find out what is McDonald’s recipe for success.

May numbers

The May results were not attained overnight. The company had to suffer five straight months of comparative same store sales declines or minimal growth. Management had to do lots of brainstorming to come up with some excellent strategies – which worked.

The outcome was a 2.6% increase in system-wide same store sales in May, beating analyst expectations of a 1.9% increase. In the U.S., comps surged 2.4% vis-a-vis a 0.6% increase in April and 2.1% projected by analysts. In Europe, comparative sales increased 2%, whereas the figure edged up 0.9% in Asia, the Middle East, and Africa.

Dollar brings dollars

The dollar menu has been a million dollar idea in the U.S. McDonald’s has promoted this more aggressively than any other fast food chain. It has willingly accepted a hit on the bottom-line in order to drive traffic with its value menu options. It also has various offers like two Big Mac burgers for the price of one. The result has been six consecutive months of increasing market share in the U.S.

McDonald’s has shown peers like Wendy’s (NASDAQ: WEN) and Burger King Worldwide (NYSE: BKW) how to leverage value meal options for increasing traffic. Wendy’s has acknowledged that the disappointing 1% growth in same store sales in the first quarter was a fallout of weakness in $1 menu options. To set things right, it is introducing six solid items in the $0.99 space. It will also have eight items between $1.29 and $1.99.

Burger King, too, has started promoting its value menu in hopes of reversing the 3% negative comps that it faced in the first quarter. It is offering two sandwiches for $5 and Whopper Jr burger for $1.29.

Experimenting with the menu

It is unbelievable but true -- McDonald’s has as many as 140 items on its menu and there are 160 more in the pipeline. The company keeps introducing new items and pulling off old ones to keep the menu fresh.

In the U.S., the company recently removed the Angus Burger and brought in new specialty quarter pounder burgers like the Bacon Habanero Ranch, the chicken wraps, and smoothies. It has also expanded its breakfast offering with items like Egg McMuffin. Limited time McRibs complete the picture.

The company is a clear trend setter in menu innovations. Burger King recently launched 10 new menu items including wraps, specialty salads, smoothies, etc. and more coffee options through its tie-up with Seattle’s Best Coffee. The imprint of McDonald’s is clearly visible in all the new additions.

Wendy’s is trying to play the game a little differently. Given the aggression that McDonald’s is showing with the menu, Wendy’s is trying to differentiate itself with more upscale items like the flatbread grilled chicken sandwich or the upcoming pretzel-bacon cheeseburger.

In Europe, McDonald’s has mostly stuck to staples like fries, burgers, and nuggets, but it is preparing to roll out more options. In China, it recently rolled out rice based options to appeal to the local taste. Although the reviews have not been too flattering, the launch does indicate the company’s intent.

The late night game

So far, the “Fourth Meal” has been Taco Bell’s territory. Wendy's is also a pioneer in the late night segment with its "eat great, even late" campaign almost 20 years back. Now, McDonald's is planning to invade this space with full gusto.

Approximately 50% of the 14,000 odd McDonald's outlets in U.S. are open 24 hours a day. And the company has said that it would roll out dinner and breakfast options from midnight to 4 a.m. in some of these restaurants from this month.

While the whole breakfast menu will not be available before standard breakfast hours, favorites like the Egg McMuffin (and its Egg White Delight variant), sausage burritos, hot cakes, oatmeal, and hash browns will surely be there. They will co-exist with staples like Big Mac burgers and chicken nuggets.

The "After Midnight" menu has the potential to take share from some of the late-night competitors due to the popularity of the breakfast items that McDonald's offers.

Last word

Some executives from the fast food industry are saying that this is the toughest competitive environment they have ever seen. But given McDonald’s recent performance as well as the depth of its strategies, I feel confident that the Golden Arches will continue to shine bright and investors will reap the results. 

McDonald’s turned in a dismal year in 2012, underperforming the broader market by 25%. Looking ahead, can the Golden Arches reclaim its throne atop the restaurant industry, or will this unsettling trend continue? Our top analyst weighs in on McDonald's future in a recent premium report on the company. Click here now to find out whether a buying opportunity has emerged for this global juggernaut.

Gaurav Basu has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide and McDonald's. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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