Every Company Falters, Eventually

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

On November 8, McDonald's (NYSE: MCD) committed the sin of being “human,” reporting that comparable store sales declined for the first time in nearly a decade. Unfortunate, yes. Earth shattering news, not really.

After a period of time lost in the wilderness, McDonald's got its stride back about the same time its growth trend in comparable store sales took hold. It proceeded to go on a streak of industry domination that has been nothing short of impressive. However, trends like this can't go on forever. Managements eventually take their eye off the ball and miss a target, or two or three. The real questions that need to be asked is “What happened?” and “How is management planning on dealing with the stumble?”

In McDonald's case, what happened was a mix of global economic weakness and resurgent competition from the likes of Yum! Brands (NYSE: YUM), which owns such fast food icons as KFC, Pizza Hut, and Taco Bell, and a newly christened Burger King (NYSE: BKW), back as a public company after yet another restructuring attempt.

Yum brands, though not a direct competitor, has been pushing hard into the same markets in which McDonald's is trying to expand, as well as in more mature markets where market share is the name of the game. With a unique mix of restaurants, Yum has been finding success in places from which traditional burger joints might have been virtually barred because of McDonald's presence. For example, China is a huge market for YUM in which it competes only indirectly with McDonald's because of its differentiated offerings. This gives it a toehold that others would be hard pressed to duplicate.

Burger King, on the other hand, does compete head to head with McDonald's. Its push domestically and internationally is for market share that can pretty much only come from the industry leader. Indeed with little more than a quarter of operating history under its belt, the perennial fast food second fiddle reported a comparable store sales increase. Not a bad showing for the recently reintroduced public company and proof that the scrappy upstart is a force to be reckoned with.

Competition nipping at its heels around the world and a weak global economy pretty much made it impossible for McDonald's to keep the same store sales growth trend alive indefinitely. It had to fall from grace eventually. Management has said all the right things, so now investors need to watch to see if it lives up to its own words of righting the trend. In the meantime, dividend focused investors may have a rare buying opportunity. Indeed, with the recent price weakness (the stock is down from over $100 a share at the start of the year), the stock is now yielding around 3.5%, not bad for one of the world's preeminent brands.

It Happens in Other Industries, Too

However, it is important to take the lessons learned here further. No trend lasts forever. Just ask Netflix (NASDAQ: NFLX) how it feels to make a mistake. That company made the ill-advised decision, some might call its choice cocky, to change its pricing in a highly inflammatory manner and, quite literally, overnight. It quickly went from gaining subscribers at a breakneck pace to losing them, even though management back peddled quite a bit on its proposed pricing scheme. The company and its shares still haven't fully recovered from the gaff, which resulted in a much more severe sell off than McDonald's mere percentage point or two, though it is off more materially than that from its highs at the start of the year. A look at Netflix's graph is actually quite frightening, since in a few months time the shares fell from nearly $300 to well below $100.

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NFLX data by YCharts

No one questions the quality of the product that Netflix provides or the implications digital media will have on the entertainment industry. What is questionable now is why anyone thought Netflix was destined to rule the world. Management's self inflicted wound was the big chink in the armor.

Netflix is a dramatic and recent example, but Wall Street is littered with similar stories. Krispy Kreme, Boston Market, and more recently Chipotle Mexican Grill are all restaurant examples where growth didn't meet the market's expectations and the stocks tumbled. In the technology space, one need only consider such one-time giants as AOL and Yahoo!. These were once companies that could do no wrong, but eventually they couldn't live up to the hype.

"Apple"ing The Story 

Now for a curve ball. Who's on top today that could easily fall if things don't go perfectly? The first name that comes to my mind is Apple (NASDAQ: AAPL), which has actually seen notable price weakness over the last few months. To some the suggestion of a material stumble at Apple may seem moronic, as if I have no idea what I'm talking about. And maybe I don't. Maybe, just maybe, Apple will keep on growing forever.

What headwinds does this tech darling face? First and foremost its own success. There is no doubt that Apple creates great, user friendly products, but can it keep hitting home runs? No. So far, however, its misses have been relatively small. Its big successes, meanwhile, have been really big. The iPod, iPhone, and iPad were all miles ahead of the competition when they were introduced. Now, however, the competition has begun to up its game (that sounds familiar). And consumers can and often are very fickle, switching to the next new thing and rapidly dropping old favorites, like the Blackberry was dropped for the iPhone. Yes, it could happen to Apple, too.

Perhaps most concerning, however, is a fact unique to Apple. The company recently lost its co-founder and visionary leader Steve Jobs. It isn't that he was irreplaceable. No one is irreplaceable. However, being able to replace a great leader on the first try is sometimes hard. And even if a company does succeed in that, what about the next guy? Is he or she going to be as good... maybe not. To paraphrase Warren Buffett, “Eventually every company is run by an idiot.”

Opportunity and Risk

To sum it up, McDonald's big task now is coming through on management's promise to regain its stride. Investors should keep a close eye on this, while at the same time considering an investment in this Dow-30 member and generally well-run company while uncertainty is high. For investors, the big task is to take this event as a warning that even great companies flounder at times. Keep your eyes out for some of the the signs, including over expansion, hubris, and management missing self imposed goals. And, yes, Apple, too, will come back down to earth some day.


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ReubenGBrewer has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, McDonald's, and Netflix. Motley Fool newsletter services recommend Apple, Burger King Worldwide, McDonald's, and Netflix. 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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