McDonald's: Who Said You Can't Teach An Old Dog New Tricks?

| About: McDonald's Corporation (MCD)
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Summary

MCD plans to roll out its customizable menu in 2,000 locations in the US.

This marks a shift in MCD's business model from fast-food to fast casual, a model deployed by CMG and Five Guy.

Too early to gauge the impact but the company is moving in the right direction. I still favor CMG and SBUX over MCD.

Event

McDonald's (NYSE:MCD) plans to expand its "Create Your Taste" customizable sandwich to as many as 2,000 locations across the US in an effort to turn around the weak comp sales in the US (link). This is the first time that the company is pushing this concept in large scale across 14% of its locations. Most important, this marks the beginning of a shift in MCD's business model as the new generation of fast food patrons wants customizable and healthier options similar to that of Chipotle Mexican Grill (NYSE:CMG) and Panera Bread (NASDAQ:PNRA).

The emphasis on health and quality is particularly driving the trend in the QSR space, thus my positive view on Starbucks (NASDAQ:SBUX) and CMG (See: North American QSRs: Avoid The Low End, Stick With The High End). I believe that the shift towards the customizable/higher-end segment for MCD is inevitable. Keep in mind that this shift will be painful in that MCD could see higher labor and ingredient costs as it may try to match the quality that competitors are offering. I remain bearish on MCD given the near-term weakness in the US and Asia.

Highlights

A shift in the business model. "Create Your Taste" concept was tested in the West Coast last year and will be expanded to 2,000 locations in California, Illinois, Wisconsin, Georgia, Missouri and Pennsylvania. Customers could customize their chicken sandwich and burgers via a touch screen kiosk and add different toppings and buns according to their preference. This is a stark contrast to MCD's traditional cookie cutter, fast-food model, and places MCD to take on the fast-casual competitors like CMG and Five Guys.

In theory, this could attract more customers and those who are willing to wait a bit longer. On the flipside, the decrease in serving time may encourage traditional QSR customers to leave for the more traditional QSRs that have shorter wait times. It is too early to tell whether this concept will revitalize MCD's soft US business, but I have long argued that the fast casual segment is where the QSR should position itself and MCD is certainly moving towards that direction.

Much needed localization in Asia. Asia remains MCD's other headache, particularly after the food scandal in China. I have long criticized MCD for failing to localize its menu, which explains its low popularity when compared with YUM! Brands (NYSE:YUM) which heavily modified its menu according to local taste. "Create Your Taste" should be rolled out in Asia to rejuvenate MCD's sales in the region in that 1) the menu could be localized and catered to consumer taste, and 2) fast casual is not prevalent in Asia, which gives MCD first mover advantage, in my view.

Conclusion

MCD is certainly moving in the right direction with this concept, and it shows that the company is finally embracing the reality of the trend towards fast casual. Near-term challenges remain. I prefer CMG, SBUX over MCD.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.