McDonald's (MCD) is a company that everybody knows and every investor is at least familiar with the name. I am going to showcase the company's "menu philosophy" and show how the company continues to be profitable. With a modest dividend of just over 3%, the company continues to grow and will make a good candidate for any investor who wishes to look for a steady long-term company to invest in.
Even though it is a cyclical business, the continued growth of McDonald's restaurants is interesting to say the least. One would logically think that when consumers have more money they would spend it at McDonald's and when they didn't, revenue growth would slow down. But customers appear to spend at McDonald's regardless.
What is generating this magnetism to the company?
It very well could be the focus the company has on its core and how it researches and presents choices to the consumer. Designed after what is called a "platform" structure, the company now researches, in detail, items that go up on its menu. Menu items are examined for profitability, capital required to make it work, and if it can build out into a national product. The Angus burger took four years of research before it hit the menus. Products that meet the company's research standards have a 9 out of 10 probability of hitting the national market. The focus of any new launch is to add to sales rather than steal shares from an existing item.
Here is an example of McDonald's launching a new menu item from one of its platforms after extensive research.
The Snack Wrap
One of McDonald's "platforms" is the chicken platform. Chicken McNuggets anchor this platform and back in the mid 2000s when sales volumes for this platform appeared to plateau, the company wanted to explore how to pick up sales. Executive chef, suppliers and franchisees got together and came up with the idea of the chicken snack wrap. The Genesis of this snack wrap started with defining the product, pricing and then it had to be well received by a focus group of 150 to 200 people. After this it went through what is called a 4 to 6 week "operational test" where things like crew positioning and equipment use was explored. Different things were explored dealing with the use of a tortilla. How should it be packaged? What was the right temperature for the customer? How flexible did a tortilla have to be? 18 months later it was introduced to the menus and McDonald's successfully added another price point without stealing share from existing items. They were able to increase business by selling a product that customers could nibble on between meals.
Where is future growth likely to take place?
Especially in mature markets, it seems that continued growth is going to take place by focusing on scaling and executing. We are talking about size and delivery to customers that expect to be in and out of there as quickly as possible. Consumers are not interested in hanging around and talking at length to employees, they want good portions, well prepared, and delivered promptly with a smile. This is all they expect and this is what the company is focusing on. Deli sandwiches were once explored as possibly something to put on the menu, but after research it was discovered that employees couldn't make them in under a minute and therefore they were never brought to the menu.
As I look at McDonald's daily chart, I am observing what looks like the possible end of a long term trend and let me tell you why I think this. As the stock has moved up, it has bounced off the lower Bollinger band. It is on its third leg of a bullish run. Usually these runs are three legs long before they change and if you notice the over bought position in the RSI indicator it is at its highest level. This signifies to me that it won't go much higher. The MACD is also showing its highest peak as of late. Making these observations, I would not speculate with a bearish trade but I would count on a pullback coming very soon.
The company will continue to grow and expand its revenue. Being a cyclical industry I am sure the restaurant will see its ups and downs but overall I would expect the company to continue to grow through the years. With the new approach it takes to developing new items to increase its revenue base and the focus on product scaling and execution, I expect the company's unit to continue to grow both in mature markets and as it expands into new global markets. As a long-term investment that people can leave in their portfolios for years, it is a good candidate.