The Fall of Fast Food?

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

If you invested $10,000 in McDonald’s Corp. (NYSE: MCD) back in January 1970 when shares were 33 cents apiece, your portfolio would be worth over $2.6 million today.  McDonald’s stock has been an essential component of the balanced investor’s portfolio for decades, and with good reason: it’s provided stable growth and returns that consistently beat the S&P 500 (73.14% versus 50.51% over the past 3 years, for example), promising profit margins (currently standing at nearly 20%), and a stellar divided yield of 3.2%.  Customers have been lovin’ the Big Macs and McNuggets, and investors have been lovin’ this safe, high-yielding stock.

In 2012, something’s gone amiss.  Despite the 12% gain in the overall market since the beginning of the year, McDonald’s stock has dipped over 11% from January 3 at $98.84 to August 13 at $87.90; it’s enough to give us the eerie feeling that we’re looking at the figures of some terrible IPO or some out-of-fashion dot-come stock, rather than good ol’ McDonald’s.  What in the name of Keynes is going on?

To heartless Mr. Market, it’s bad enough when revenue and/or growth misses projections; in the case of Chipotle Mexican Grill (NYSE: CMG), 8% actual growth versus 10% projected growth for the third quarter was enough to slash its price almost 22% in one day.  McDonald’s not only missing its predicted growth mark, its growth was negative for the third quarter; comparable sales dropped 0.1% in the United States, 0.6% in Europe, and 1.5% in the Asia/Pacific, Middle East, and Africa (APMEA), while system-wide sales fell 3.2%.

Okay, so McDonald’s had a bad quarter, we get it.  Surely stiff competition negatively impacted its numbers, so these losses were offset by gains in similar fast food companies?

Wrong.  Burger King Worldwide, Inc. (NYSE: BKW) dropped 6.7% since June 20, when it reentered the market as a publicly traded stock.  The Wendy’s Company lost 86% of its value since 2003, trades at a terrifying P/E of over 364, and currently sells for $4.37, barely placing it above penny stock status.  Yum! Brands, Inc. (NYSE: YUM) is down 9.4% since April, when it reached a lifetime high of $73.93 and promptly spiraled downwards faster than a dropped taco.

Sure, rising food prices definitely had an adverse affect on sales and revenues across the food industry board, but the stunning success story of Panera Bread Co. (NASDAQ: PNRA), with its third quarter 7.1% growth in same-store sales and upgraded full-year earnings guidance, clearly shows that something else is at play here.  Even though these three fast food companies combined trade at a fraction of McDonald’s overpowering market capitalization of $88.64 billion, one factor is eating into all of their earnings: the consumer’s increasing preference for healthy alternatives to fast food.

If you’re anything like me, watching Supersize Me back in the day probably scared you off from Mickey D’s for a few solid months.  Let’s face it: McDonald’s has had its share of controversies, from its use of the infamous pink slime chicken (which it only recently banned from its restaurants) to class-action lawsuits to its ever-growing reference alongside health content on obesity.  Its name has been dragged through the mud so often in the past decade that it’s a small miracle the company’s managed to remain as stable as it’s been.

The discerning reader’s mind is probably shooting straight to McDonald’s revamped menu, which includes healthier entrees such as salads and grilled chicken sandwiches, as well as increased menu options, such as the choice to switch out Happy Meal French fries in favor of apple slices.  However, salads run for about $5, and although that doesn’t sound like much, it’s  significantly more expensive than the usual burger-and-fries combination you can pick right off the dollar menu.  And let's not forget that many of these "healthier" options come loaded with even more fat, cholesterol, sodium, and calories than traditional options- one premium bacon ranch salad can cost you 700 calories and more than a day's serving of fat.

Entrees at Panera Bread, which include an assortment of high-quality salads, soups, and sandwiches served in the environment of a fast-casual cafe, begin at around $6.  Panera’s chicken is antibiotic free and all natural, which is a far cry from McDonald’s horrifying history of pink slime.  Nutritional information is transparent, because Panera’s got nothing to hide; for less than 600 calories, you can enjoy a salad, soup, side, and beverage.  And for an average of $1 more per sitting, you can dine in the relaxing atmosphere of a quaint, friendly, and cozy cafe, rather than a funhouse filled with screaming kids, obnoxious hues of red and yellow, and that omnipresent clown.  Consumers are willing to pay a premium for these options, as evidenced by Panera’s explosive three-fold expansion from around $50 per share in August 2009 to today’s $154.49.

McDonald’s has long been heralded as a solid company that allows investors to expand their wallets, but in the past decade, it’s also acquired a reputation for expanding customers’ waistlines.  Today’s consumer is more informed, more discerning, and more health-oriented, and the all-American burger-and-fries combo just isn’t going to cut it anymore.  If McDonald’s wants to stay competitive with explosive-growth fast-casual companies like Panera Bread, it’s going to need more than a few salads half-heartedly thrown on its menu; it’s going to need a full-blown makeover, inside and out.  Can McDonald’s pull it off?  For the sake of investors, I can only hope so- but in the meantime, I wouldn’t be surprised to watch Panera Bread grow into a new portfolio staple.

LizPowers has no positions in the stocks mentioned above. The Motley Fool owns shares of Chipotle Mexican Grill, McDonald's, and Panera Bread. Motley Fool newsletter services recommend Burger King Worldwide, Chipotle Mexican Grill, McDonald's, Panera Bread, and Yum! Brands. 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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