With the introduction to June comes summer travel and lots of fast food stops at restaurants like McDonald's (MCD), Burger King (BKW) and Wendy's (WEN). This brings to mind investing in fast food chains, and I am personally fond of McDonald's. There are some challenges the restaurant faces including the impact of constant menu changes, a possible minimum-wage increase in the near future, and the change in consumer attitudes toward fast food as they look for deals. Let's take a look at some of these things the fast food restaurant faces now and in the future.
Impact of the Minimum Wage Increase
I believe at this point investors need to be reminded of what is lurking on the horizon is bound to have a significant impact on the fast food chain. I am talking about the minimum wage increase that Obama would like to introduce to the nation. Presently it is $7.25 and he would like to increase it to $9.00 an hour. His goal is to introduce this wage hike by 2015.
The theory behind the wage increase is that it will put more money in the hands of low income wage earners in America who are more likely to spend it and put that money back into the economy. This might be one outlook but another opinion is that it will have a negative impact on certain types of businesses like McDonald's. Michael Saltzman, a researcher at the Employment Policies Institute, had this response to the possibility of a increase:
"Tight margins - keeping a few cents in profit from each sales dollar - means that an employer faced with higher labor costs can't just absorb them,"
This is something to keep in mind but it's not something that is going to have an immediate effect upon McDonald's. It is a political issue that still has to go through Congress, and depending on the makeup of the House and Senate, investors will just have to see if it has a chance of going through or not. But it is something that we really need to keep in mind.
Wendy's is growing up
Wendy's has always been the less attractive step-child walking in the shadows of the elegant McDonald's. The fast food chain had not done very well and was downgraded by a number of analysts. It appears the company may be reaching puberty as it is becoming more attentive to its looks. McDonald's has been transforming its stores for a number of years throughout the United States while Wendy's sat there doing nothing, but it is on an aggressive plan to put a new face on approximately 20% of its stores in the United States. This is a great undertaking and is needed if the fast food chain is ever expecting to boost its traffic.
Whether or not analysts believe that the transformation will really help the company's bottom line has yet to be seen. But it has no choice - this is something Wendy's has to do to keep up with McDonald's.
As consumers associate the company in the same class as McDonald's and Yum brands (YUM), the menu is also something that's going to have to be addressed because of how fickle consumers are today. Quality and taste are important, but in today's economy consumers are not going to buy the most expensive thing because they think it tastes good. Consumers are getting thrifty, constantly looking for deals. Wendy's menu is a bit more expensive than the other two and will have to be addressed to steal business from McDonald's or Burger King.
Menu Changes Are Challenging
McDonald's is adjusting its menu again. What is on the "no buy list" this time around? Caesar salads, McSkillet burrito, Southern style biscuit and steak bagels are the candidates for oblivion.
Let me paint a picture for you of the battle that McDonald's faces with these constant menu changes. Keep in mind that it's important to update and be flexible with a menu because this is where the company makes its money, but at the same time this peculiar market adds challenges for the company.
The cost of goods being sold has risen about 14.3% over the last three years. What do I mean by "cost of goods being sold?" The COGS is the cost of obtaining raw materials and producing finished goods that are then sold to consumers. The challenge comes because even though we saw this type of increase in COGS, sales barely increased 0.2% above 14.3%. That's not much of an increase and there are factors behind this. A larger menu means more advertising costs. Administration and labor also picks up because a franchise has to train employees and they spend more time preparing foods.
With a company like McDonald's, this is a necessary evil. The company continues to explore, expand, and contract its menu and that won't stop. Different things have been introduced to the menu over the last 5 to 6 years that are still there, like snack wraps and Apple slices, but as I have stated earlier, some are also being taken off.
The State of the Fast Food Market
Updating menus and offering a nice plethora of food is needed for a successful fast food restaurant, but it also needs more. Customers today not only demand the choices but we are a nation of "coupon toting consumers" who constantly check out limited time offers and other promotions before they decide where to eat. Thanks to the instant coupon trend of the mobile app marketing movement, instantaneous decisions are made to go places based on coupons that have taken business away from many fast food restaurants.
McDonald's has entered the game as well as other fast food giants like Wendy's. Both companies are going to create more "limited time offers" in an attempt to bring in and keep more customers. It even has to be willing to cut into profit margins if necessary.
Although there are some big challenges ahead for McDonald's, I believe the restaurant will adapt because it always has. There's going to be times where growth won't be as "pretty" as other quarters but the company has proven it has the wherewithal to adapt and change as needed. I think the most challenging thing the company will face over the next three years would be the possibility of a minimum wage increase, but that's political so we'll have to see how it plays out.