There was bad news and good news in McDonald's (MCD) Q1 report published on Friday morning. The bad news is that the company missed analyst expectations by 1 cent. The good news is that both earnings and revenues continued to climb in this difficult global economic environment. What is even more remarkable is that McDonald's continues to grow after so many years and so many challenges from all sorts of health and weight conscious groups maintaining high operating margins, and Return on Assets, which make its stock a buy for value investors. How does the company's leadership do it? What are the challenges?
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Dunkin' Brands Group (DNKN)
Panera Bread (PNRA)
Two ways: First, with a franchise business model that allows its franchisee-members, management and shareholders to share the risks and rewards from the discovery and exploitation of new business opportunities - McDonald's model has become the norm for other franchise organizations. Second, with the creative destruction of the business, coming up with fresh products and services to address the needs of a diverse consumer market - as shaped by demographic, economic and local factors around the world - sometimes eliminating traditional products that have come under criticism by different consumer groups; and even refurbishing stores to look appealing to customers.
McDonald's rode the baby-boomer trend in the 1960s, the swelling ranks of teenagers and the rising female labor force participation, supplying a fast and inexpensive menu. In the 1970s and the 1980s, the company rode the globalization trend by transferring the American way of life to many countries around the world. At the same time, it adapted to the social context of each county by franchising to local entrepreneurs.
In the 1990s and early 2000s, McDonald's made successful efforts to restore its corporate image by launching the "Fast and Convenient" campaign that involved the radical adjustment of the company's product portfolio to emerging food industry trends - the refurbishing of McDonald's restaurants to achieve a branded, updated and a more natural dining environment. The "fast" and "convenient" elements of the McDonald's concept were augmented by the "healthy" and "more natural" element, by adding salads, fruits, and carrot sticks to the menu.
In recent years, McDonald's has continued to broaden its product portfolio by offering high quality coffee and healthy drinks (either through its traditional restaurants or the Cafés), competing head to head with Starbucks and local cafeterias - benefiting by local trends like austerity in Europe, and robust growth in China.
A few words of caution: After growing by leaps and bounds for almost five decades, McDonald's is facing market saturation, in addition to competition, which may limit its growth. That's why the stock is a good fit for value rather than growth investors.