McDonald's: Value Proposition Could Come Undone
Jane 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) built its brand on value. For 2011, it had record revenue of $27 billion. But that value proposition could be coming undone. This darling of the stock market and dividend aristocrat could lose its distinct brand identity. If it does, it will drift amid the clutter at the lower end of the dining-out industry.
The first threat is to its pricing. The cost of beef keeps rising. The U.S. Department of Agriculture expects a 5 percent increase this year, following a 10 percent boost last year. Drought, high corn prices, and a dog fight for land led to this. Even if those conditions ease, with the improvement in the standard of living of developing nations beef consumption is up. Therefore gven that demand, prices are likely to keep rising.
Late last year, McDonald’s put out there the possibility that it would raise prices again, for a third time. The response from business writers like AP’s Christina Rexrode was a warning that McDonald’s should be cautious, “Companies know that they still have to be careful to not raise prices too much and drive away customers.” Think about it. For breakfast, low-end fast food player Dunkin’ Donuts (NASDAQ: DNKN) could wind up cheaper. One added incentive for workers to develop the Dunkin' habit is that while there they can also pick up a dozen donuts for the construction site or office. Dunkin’ has kept it brand identity consistent. It communicates one message: total satisfaction which anyone can afford.
Another threat is a physical make-over of the iconic Mickey D circus-like decor. It plans a $1 billion+ remodeling to bring its physical image upscale. Forget the clown-red. Bring on earth tones. That should be completed for most of its 14,000 outlets by 2015.
This move positions it against Starbucks, at least the Starbucks (NASDAQ: SBUX) we all have come to know. Meanwhile Starbucks is itself experimenting in select locations with its own traditional look. McDonald’s could be following a model which could itself be yesterday. Also, will customers, and more to the point their children, welcome the new ambiance?
The third threat is the competition from fast-casual. During the economic downturn, that niche improved its game, exploiting the opportunity of serving the new kind of customer who had downshifted from casual as well as upscale dining. Consider the menu from Panera (NASDAQ: PNRA). It's more diverse than Mickey D's and many selections are priced competitively with that fast food outlet.
In the New York Metro Area, Panera provides lunch of a grilled chicken sandwich with lettuce, tomato, and cheese on a roll with a soda and bag of chips for $5.99. For just a sandwich in the same metro area McDonald’s charges between $2.03 and $3.06. Panera salads begin at $5.49. At McDonald’s they range from $5.39 to $5.59. Forty percent of fast-casual also serves wine and beer. So does Starbucks at four locations, as a market test. As a fast food facility which focuses on the children’s segment, that might not be possible for McDonald’s. Eventually, that could hurt it.
Clearly, two forces are at play. McDonald’s is changing its modus operandi. At the same time, its competition is able to stand toe-to-toe with it or even throw in some extras. The advantage many of those competitors have is that the branding is not child-centric. McDonald's is vulnerable.
Motley Fool newsletter services recommend McDonald's, Panera Bread and Starbucks. The Motley Fool owns shares of Panera Bread and Starbucks. janegenova has no positions in the stocks mentioned above. 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.