This Restaurant Giant Plans to Win

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

Last quarter, McDonald's (NYSE: MCD) same store sales in the US and Europe benefited from new product launches, but China was affected by the avian flu. The company has a ‘plan to win’ strategy, where the company is focusing on menu, customer experience and brand expansion. Another strategy - new packaging - which is exclusively focusing on communicating the brand, will be rolled out in all of its stores during 2013. Let’s look at these strategies in detail.

New product launches are benefiting the US and Europe

McDonald's US same store sales have outperformed the Street estimates significantly with SSS up 2.4% against the Street estimates of 1.9%. The company has removed its Fruit & Walnut Salad and Chicken Selects from the menu so that there will be scope for new offerings. The company launched Fish McBites and Filet O’ Fish LTO items. The company is aggressively promoting its Dollar Menu with the Onion Cheddar Burger and Hot ‘n Spicy McChicken sandwich. It has also launched a $1 Hot ‘n Spicy McChicken sandwich in half of its market.

Recently, comps were benefited from the launching of the Egg White Delight in the breakfast category and Premium McWraps. Additionally, McDonald's is offering three new toppings to its Quarter Pounder Burger, i.e. Bacon Habanero Ranch, The Deluxe and Bacon and Cheese.

In Europe, the company reported same store sales up 2% against the Street estimates of 1%. Russia and the UK are also generating positive same store sales with the company's ‘barbell menu strategy’ and breakfast expansion.

Plan to win

The company is working on three things under its ‘Plan to Win’ strategy. These three things are menu changes, providing excellent customer experience and easy accessibility to a broad customer base.

The company is always trying to offer something new or fresh to its customers. This year it has several new products like Fish McBites, Premium McWraps, etc.

The company believes that customer experience is the utmost important priority. In order to provide a good customer experience, the company has re-imaged 60% of its restaurants and expects to complete the remaining 40% over the next two years. The customer is also making use of better technology to enhance this experience further.

As to the third priority of easy access, the company has extended operating hours and is ensuring that the company is fulfilling the needs of all customers.

New packaging design

The company is planning to roll out its new packaging design for carry out bags and beverage cups to communicate its brand. This new packaging will contain text, illustrations and QR Codes. Text will be translated into 18 languages. New packages will give more information about the product customers are eating, and promote McDonalds as a brand. The company stated that this will help to communicate information about the brand in an easy way.

Peer analysis

Let’s look at the two peers of McDonald's. What strategy do they have to compete?

The first major peer of McDonalds is Yum! Brands (NYSE: YUM). In China, Yum! is also facing challenges due to the avian flu outbreak. Along with the avian flu outbreak, the company’s sales have also been affected by the chicken controversy in China. Its KFC brand faced accusations that it had purchased chicken with extra chemicals and was selling it to the consumer. The company since launched 'operation thunder' to recover from this controversy.

The company is looking forward to doubling the annual sales of its Taco Bell brand over the next 6-7 years with unit expansion and new menu additions. The company has launched new products under this brand and is planning to open more than 100 stores per year.

Another competitor, Burger King Worldwide (NYSE: BKW), has very robust plans including its four pillar plan, re-franchising plan and share buyback and dividend payment plans. Under its four pillar plan, the company is looking to strengthen four important parts of business, i.e. menu, market communication, image and operation. The company has completed 97% of franchising, and under the re-franchising initiative franchisees will be given to the best franchiser to operate.

<table> <thead> <tr><th> <p>Company</p> </th><th> <p>P/E ratio</p> </th><th> <p>Dividend yield</p> </th><th> <p>P/S ratio</p> </th></tr> </thead> <tbody> <tr> <td> <p>McDonald's</p> </td> <td> <p>18.03</p> </td> <td> <p>3.13</p> </td> <td> <p>3.51</p> </td> </tr> <tr> <td> <p>Yum!</p> </td> <td> <p>21.98</p> </td> <td> <p>1.88</p> </td> <td> <p>2.33</p> </td> </tr> <tr> <td> <p>Burger King Worldwide</p> </td> <td> <p>51.13</p> </td> <td> <p>1.16</p> </td> <td> <p>4.12</p> </td> </tr> </tbody> </table>

If we compare the P/E ratio, then that of the Burger King Worldwide is exceptionally high. Its P/S ratio is also very high. It is not a very good sign for the investors. McDonalds seems to be a good choice with the lowest P/E, highest dividend yield and a moderate P/S ratio. Burger King Worldwide has the lowest dividend yield. Yum! has the lowest P/S ratio, but its dividend yield is also low.


McDonald’s is targeting new product launches. The new menu has shown positive results on its US and European same store sales, whereas China’s same store sales are declining due to the avian flu outbreak. It has strategies like ‘Plan to win’ and new packages design, but it will take some time to show the results. In short, the company needs to have a more robust plan to grow. Long term growth will be achieved with the new menu and new package strategies. So I recommend a buy. 

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Gayatri Sharma 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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