Today’s review is for the Jalapeño McChicken from McDonald’s.
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New Big Macs May Not Do Much to Boost McDonald’s Stock
McDonald’s announced earlier this week that it will begin offering modified versions of its flagship burger, the Big Mac. Like many previous menu changes at the Golden Arches, this one (which was first unveiled in November) comes as the company continues to try to drum up new sales across its 14,000 U.S. locations. But recent history, not just at McDonald’s but at other fast-food chains, suggests that it’s highly unlikely that such changes will have a lasting effect on either its sales figures or its stock.
The company, which will report its quarterly earnings before trading on Monday, has been trying to revamp its menu since Steve Easterbrook signed on as CEO in March 2015. Since then, McDonald’s has started serving breakfast all day and introduced the value menu McPick 2, moves that quickly paid dividends. Immediately after the launch of all-day breakfast in October 2015, the company posted a 5.7% increase in same-store sales for the fourth quarter of that year, a positive trend that continued on into early 2016. Investors took notice, bumping the stock price from $91 in late August 2015 to an all-time high of $132 in early May 2016.
But the excitement didn’t endure, and sales for the second quarter of 2016 missed analysts’ expectations. Though McDonald’s posted stronger-than-expected third-quarter numbers, its coming earnings report may not be so great. In a recent survey conducted by Noruma-Instinet that polled 22 franchisees, accounting for 168 locations in all, same-store sales were estimated to be down by 1.2% year over year. The company’s share price (MCD, +0.07%) has dipped since its high; the stock closed Friday at just over $122.
The debut of new Big Macs may bring some initial excitement and sales among consumers curious to try the new novelty. That curiosity could translate into a bump in the stock price. (Though the novelty factor may not be that high: The new variations are the Mac Jr., which is just like a Big Mac, except smaller, and the Grand Mac, which is bigger.)
But upticks in sales from new products tend to be short-lived, as other fast-food chains have found. Taco Bell introduced Doritos Locos tacos in 2012 to great success, with 1 billion of them sold in the first year alone. But by 2014, sales were waning again. KFC, which added the Double Down to its menu to much fanfare in 2010, sold 10 million of the sandwiches in its first three months, but discontinued it later on due to lagging sales. (Both Taco Bell and KFC are subsidiaries of Yum! Brands (YUM, +0.86%).)
Stale menus may not be as big a threat to fast food chains as changing tastes are. More consumers have moved towards frequenting “fast casual restaurants” that boast higher-quality ingredients and a different in-store atmosphere, such as Shake Shack and Five Guys. In response, the fast food industry’s major players are all engaging in an arms race for fresher and healthier products.
Easterbrook has championed improvements in food quality in an effort to entice eaters back to McDonald’s. (For a detailed look at his efforts, read this feature by Fortune’s Beth Kowitt.) The company has cut the use of artificial preservatives, eliminated certain antibiotics from chicken products, and eliminated high fructose corn syrup from its buns, among several other changes.
Whether or not the changes in food quality will get more people to step inside a McDonald’s remains to be seen, though. Still, since total foot traffic to fast food restaurants is expected to remain relatively flat this year, all the changes may not end up making much of a difference to existing customers who know what they like.McDonald’s shareholders have one other issue to worry about. Earlier this month, McDonald’s announced it had struck a deal to sell a controlling stake in its China and Hong Kong operations to a Beijing-based company for $1.7 billion.
The move leaves McDonald’s with a 20% share in the venture, which is expected to open 1,500 new locations over the next five years, on top of the 2,400 restaurants already there. Easterbrook rationalized the deal by stressing that the company’s new partners have unique knowledge that will allow for greater penetration into the market. While that may be true, McDonald’s has sacrificed a great deal of future revenue.
Review conducted by TheReportOfTheWeek.
January 21st, 2017.