McDonald's Uphill Battle

| About: McDonald's Corporation (MCD)

Summary

McDonald’s recently extended its all-day breakfast and plans to invest in Germany to draw customers back to its stores.

All-day breakfast extension is unlikely to be successful due to competition. Germany expansion may not be feasible due to the complexity in customized menu.

I would avoid MCD and prefer higher quality restaurants such as Starbucks.

McDonald's (NYSE:MCD) made two strategic moves to address some of the concerns that investors have. In recent weeks, analysts have been cutting estimates on McDonald's, citing weak US comps sales, sluggish traction amongst the consumers and potential risk of Brexit. First, Nomura downgraded the stock in fear of slowing US sales and the weaker comps. Then Credit Suisse lowered its estimates due to the potential pullback on consumer spending and volatile currency. Just recently. Cleveland Research also lowered its MCD expectations on weak sales trend. Consensus now expects US comps to be +3.6% compared with 5.4% in Q1. Part of the reasons for the decline is increasing competition as well as a pullback on consumer spending in the wake of the Brexit.

To offset these weaknesses, MCD recently announced that it will expand its all-day breakfast menu in an attempt to give the US comps sales a boost. As for the international segment, MCD announced that it will invest $557m in Germany to modernize its restaurant with custom-made burgers, child-play areas and table services. Both of these initiatives are designed to draw customers into the store but I do not expect them to have material impact on MCD in the near-term.

For the all-day breakfast, MCD will include both McGriddle and sandwiches in all of its US locations. On the surface, this is a very shrewd move since the all-day breakfast initiative has been credited for MCD's comeback. However, the all-day breakfast has been facing increased competition from the Dunkin Donuts and other QSRs that have extended their all-day breakfast offering so it is questionable on why this would reverse the trend. Although all-day breakfast has been very successful in driving traffic and higher purchase per user as suggested by the research at NPD, the concept was new at the time and I believe that the novelty effect will eventually wore out overtime as more QSRs participate in this initiative.

Besides the diminishing novelty effect on the all-day concept, the investment in Germany is designed to drive sales in a region where comps will be uncertain as the Brexit could be a drag to consumer confidence. Customization is a good idea in that consumers get exactly what they desire but the issue with this is that customization is time consuming, which contradicts the notion of "fast" food. Customization is usually reserved for higher-end places such as Five Guys or Hero's Burger but MCD does not have the brand to move up the fast casual segment because it is known as a low-end fast-food place. Achieving delivery quality, customization and speed at the same time could create complexity that MCD is not accustom to and the company may need to train new employees to deal with it.

Conclusion, investors should not get too excited over MCD's recent changes in the all-day breakfast and expansion in Germany.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.