MCD Stock: This Should Keep McDonald’s Corp. Stockholders Up at Night

MCD StockThe Growing Trend That Should Terrify McDonald’s Stockholders

McDonald’s Corp. (NYSE:MCD) is facing a chronic crisis. Solutions to bring back sales volumes and revive the brand are not working, according to many American franchisors, even while McDonald’s stock is trading at a five-year high of $104.49. Still, if the company doesn’t face up to its challenges, it could all be crashing down, even if MCD stock has drawn attention from a major investment bank.

Credit Suisse Bullish on McDonald’s Stock

Credit Suisse recently raised its opinion on McDonald’s stock from “neutral” to “outperform,” setting a target price of between $100.00 and $112.00, expressing its confidence in the new leadership’s positive steps and looking ahead to further improvements. (Source: Amanda Schiavo, “McDonald’s (MCD) stock added to Credit Suisse U.S. Focus List”, The Street, Oct. 19, 2015.)

According to these assessments, the consultancy believes that the dynamics of sales in comparable stores in the United States will begin to turn around (driven by operational changes and menus), which have not yet been reflected by the market.

Credit Suisse estimates that five to six percent upside potential comes from current expectations due to higher sales, overhead reductions, marketing, and advantage effects. Credit Suisse therefore sees a favorable risk-return ratio, “even a relatively modest recovery scenario,” for MCD stock. McDonald’s stock is experiencing an uptrend, trading at near five-year highs. Shares could hit targets well above Credit Suisse estimates—$125.00 or higher—but franchisors must be convinced about the effectiveness of the new strategy first.

Such is the loss of confidence at the company. In an attempt to revive the company’s fortunes, CEO Steve Easterbrook has decided to introduce the concept of 24-hour breakfast at 24 U.S. stores. (Source: Doug Bolton, “McDonald’s is facing a ‘deep depression’ and could be in its ‘final days’, say US franchise owners,” The Independent, October 18, 2015.)

The experiment failed; this menu option has merely added problems in the kitchen. Staff members are under pressure as they also run a higher risk of making mistakes. One franchisor seemed to speak for all, as he accused; “the CEO is paving the way of our defeat.” (Source: Annie Gasparro, “McDonald’s Size Amplifies any menu Changes,” The Wall Street Journal, March 5, 2015.)

But these are not the only changes launched in the United States to compete with emerging slightly higher-end restaurant chains such as Chipotle Mexican Grill, Inc. (NYSE:CMG) and especially those similar to rapidly expanding Bojangles’, Inc. (NASDAQ:BOJA). Bojangles’ has 622 restaurants, most of which are in the southeastern United States.

McDonald’s Faces Uncharted Competition

Thanks to its initial public offering, Bojangles’ is set to continue growing at a fast pace. This does not bode well for the more established fast food or family restaurant chains like McDonald’s. Wall Street expects Bojangles and Chipotle to account for an ever-larger share of restaurant visits. Both of these have been invading McDonald’s territory and stealing market share.

McDonald’s has lost customers in Europe. However, it is the U.S. trend that most reflects an apparent brand crisis, or at the very least, a shift in popular tastes. The many efforts to revive the brand have failed. Chipotle and Bojangles’ are so-called “fast-casual,” rather than fast food restaurants. The golden arches are being forced to enter a new market; one they did not create.

Bojangles’ is merely the latest publicly traded restaurant chain to challenge McDonald’s. There are over a dozen such rivals in this market, which now includes anything from Starbucks to Taco Bell.

McDonald’s cannot be faulted from trying. It changed its look, using kiosks and adopting digitally customizable menus while increasing its range of so-called healthy products. It even revived the Hamburglar brand, based on one of the mythical characters popularized by the chain TV commercial in the 70s and 80s. However, the hemorrhage of customers away from its doors has not stopped. McDonald’s is simply getting lost in the effort of trying to please too many people.

Changes Confusing McDonald’s Franchisors

McDonald’s restaurant owners interviewed by analyst Mark Kalinowski were asked to give the company’s revival or rebranding efforts a rating between one and five: the average response was  1.69, the worst result for 12 years now.

Customizable menus, a special black burger for Halloween, and 24-hour breakfast are not working. For any other company to challenge its own approach and trademark products would have appeared as normal in an effort to catch up to the sector leader. In McDonald’s case, the changes suggest something akin to insecurity (if not desperation) to secure long-term survival.

In reality, as is clear from the evidence collected in a survey of affiliates, their bitterness and pessimism in their responses is also explained by the organizational problems experienced in the implementation of the changes. The common denominator is stress. The wider and diverse menu changes the fast food model, as it forces restaurants to be ready to make an ever growing list of dishes. It complicates the plans of those who must manage the stoves and the orders.

The challenge for McDonald’s, if it wants to retain what made it successful in the first place, is hard. Ronald McDonald’s smile must reverse two years of lower sales while countering the worldwide population’s growing awareness about the importance of healthier lifestyle and nutrition choices. The company must also take care to listen to its franchisors, since they are the ultimate customers for McDonald’s Corporation.

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