McDonald’s Starved for Ideas as Burger King Lures Diners
For McDonald’s Corp., it’s business as usual -- and that’s the problem.
McDonald’s, which earlier this month reported its first monthly global same-store sales decline in nine years, hasn’t introduced enough new menu items to keep U.S. customers excited. While the company turned its sights on Starbucks Corp. (SBUX) in recent years in a bid to bring in new customers with McCafe beverages, Burger King Worldwide Inc. began luring business away from McDonald’s with more family-friendly foods, traditionally McDonald’s strong point.
To set about reversing the slide, on Nov. 15 Oak Brook, Illinois-based McDonald’s announced the departure of Jan Fields, a 35-year veteran who had been running the U.S. operations, and said they will push value menu items in advertising to boost sales.
Meanwhile, Burger King has been excelling at a game McDonald’s worked to perfect years ago, introducing a steady stream of new menu items, such as snack wraps and gingerbread sundaes for the holidays.
McDonald’s has “not had anything to talk about of substance,” Michael Kelter, a New York-based analyst at Goldman Sachs Group Inc., said in an interview. “People are going elsewhere.”
Chief Executive Officer Don Thompson, who took the helm in July, is under pressure as the company’s stock has dropped 14 percent this year, compared with a 13 percent gain for the Standard & Poor’s 500 Index. (SPX) In October, after reporting quarterly profit that trailed analysts’ estimates, Thompson said the chain was increasing advertising for its Dollar Menu to boost sales.
“We remain focused on serving our customers and offering them a great experience every time they visit our restaurants,” Heather Oldani, a spokeswoman, said in an e-mail.
Critics say pushing Dollar Menu items isn’t likely to turn around sales because it simply encourages people to spend less, rather than buy more, squeezing profit margins.
“First and foremost, they need to maybe tone down the Dollar Menu,” said Walter Todd, chief investment officer at Greenwood Capital in Greenwood, South Carolina, which owned 22,132 shares of McDonald’s as of Sept. 30. “You can get a double cheeseburger for $1 -- why do you want a Quarter Pounder for $3?”
The company’s quarterly sales drop is “not something that you expect or want, and I think management has to be clear about the steps they’re taking,” Todd said. “If we were to see a continuation of some of these trends for consecutive months or quarters, then we might look elsewhere.”
Kelter said he’s “skeptical” that hyping the Dollar Menu will turn around same-store sales.
“You’re training your consumer to want to spend less and you’re compounding some margin pressures,” he said.
McDonald’s U.S. company-owned restaurant margin narrowed to 19.8 percent in the three months ended Sept. 30 from 21.1 percent a year earlier and 22 percent in 2010, according to company filings. McDonald’s has cited higher commodity, labor and occupancy costs for the margin decreases.
In October, Thompson said that McDonald’s will have a “stronger new menu presence for 2013 than we have had in 2012.” Its last big hit was McCafe.
While McDonald’s has introduced new limited-time offers such as Chicken McBites, it has focused mainly on beverages during the last three years. The fast-food chain has introduced different flavors of McCafe smoothies, chocolate-chip coffee drinks and frozen lemonade as it tried to steal Starbucks customers looking for a less expensive option. While urging customers to “Drinkcessorize” with ads, it forgot about food, Bob Goldin, executive vice president at Chicago-based researcher Technomic Inc., said in an interview.
The explosion of drinks meant less food innovation, Goldin said. While McDonald’s has been focused on higher-margin beverages, it may now look to new snack and breakfast items, as well as lighter fare to draw Americans, he said.
Recently, McDonald’s, which has for years offered salads and other menu choices beyond the standard burger-and-fries fare, has faced more competition from rivals as they follow suit.
In recent years, Burger King (BKW) had success targeting younger males with frat-friendly ads featuring the King. As joblessness rose among young men, the strategy faltered and Burger King pivoted, introducing its own versions of McDonald’s favorites. It began selling fruit smoothies, salads, snack wraps and soft-serve ice cream -- replicas of McDonald’s innovations. Burger King’s new strategy is working.
Burger King has “gained share in women and seniors, where we hadn’t focused as much in the past,” Chief Financial Officer Daniel Schwartz said in a telephone interview last month. The company began getting more market share when it introduced salads and snack wraps, he said. It sells chicken, apple and cranberry salads and chicken BLT wraps.
The Whopper seller, which also introduced Cinnabon brand cinnamon rolls this year, said comparable-store sales rose 1.6 percent in the U.S. and Canada in the third quarter. It also recently started selling and promoting gingerbread flavored sundaes and milkshakes for the holidays.
“You’ve seen Burger King be very aggressive with new food offerings,” said Janna Sampson, co-chief investment officer at Oakbrook Investments LLC in Lisle, Illinois, which owns about 360,000 shares of McDonald’s. Still, McDonald’s has “the premier test kitchen in the business,” which is probably “running full tilt trying to come up with new things,” she said.
McDonald’s had nine limited-time or test items from June through September, while Burger King had 20 on its menu, according to Datassential, a food industry researcher in Los Angeles. Burger King sold an Italian basil chicken wrap, raspberry smoothie, popcorn chicken, and sweet-potato fries, while McDonald’s had chicken-and-bacon McWraps and Arctic Orange shakes.
The Big Mac seller also delayed its annual limited-time McRib sandwich this year. It will begin selling it in December to boost sales during the month, where it will be going up against a 9.8 percent U.S. comparable-store sales increase from last year.
The chain needs an entirely new type of item to boost revenue and outdo its rivals, said Technomic’s Goldin.
“Putting another type of cheese on another hamburger,” he said, “is probably not going to be driving a whole lot of incremental sales.”
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