The Decline Of McDonald's

| About: McDonald's Corporation (MCD)
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By William Zhou of NYU Finance Society

The famous golden arch, a major pillar of the world's fast food market, is undergoing a sharp decline. At 35,000 global outlets and over $28 billion in annual revenue, McDonald's (NYSE:MCD) is without a doubt the largest restaurant entity. However, it is experiencing major problems on a macro scale. At the end of the third quarter of this fiscal year, McDonald's has seen decreases in consolidated revenue, operating income, and earnings per share. According to its earnings releases, consolidated revenue fell 5% compared to last year, while consolidated operating income fell 14%. Diluted earnings per share of $1.09 fell 28% from last year. McDonald’s management even stated that they felt their performance was underwhelming. These metrics marked a growing trend for McDonald’s, which has seen same-store sales decline over the past year.

The decline is not only domestic, but also international. Global comparable sales decreased by 3.3% over that same period. Areas of supposed expansion, such as Asia and Africa, have seen same-store sales decline by 14.5% in the month of August alone. McDonald's is having struggles with its Chinese suppliers as it is in the midst of a major food safety scandal. It had to suspend major food processor OSI, which led to increased expenses for sourcing its beef and chicken. These events will severely stagnate future growth in that region of the world as McDonald's seeks to remedy their supply issues.

In the US, management is blaming the poor for no longer being able to afford McDonald's, citing higher food prices as the reason for the decline. But in fact, it is middle-class people who are no longer frequenting McDonald's stores. Competitors such as Chipotle, Panera, and other fast-casual restaurants are taking over market share from the fast-food sector. Chipotle alone has seen a 19.8% jump in same-store sales and a 57.8% increase in profits over the third quarter. And among the worst hit has been McDonalds. Tastes are changing in the United States, as customers are no longer as willing to trade quality for low prices. Parents are not taking their kids to McDonald's anymore because they don't what to feed them burgers when they do not even know what goes into the beef.

McDonald's troubles are similar to that of its other fast food competitors as Americans are becoming more aware of healthy and fresh eating. When you can buy a higher quality product from an outlet such as Potbelly, Freshii, or Chipotle for only a few dollars more, why elect to buy a stale, unhealthy burger?

McDonald's hopes its troubles can be remedied by a total revamp of their junk-food image. But we see other major fast food players, such as Yum! Brands, owner of KFC, doing the same. These company’s goals are to break into that fast-casual sector and take back market share from those brands like Panera and Chipotle. But, I see these trends of decline and decay continuing. The golden arches are too ingrained in American's minds as a place to eat cheap, shoddy, unhealthy food. McDonald's can and will install newer customer interfaces and healthier menu options. Despite what mirrors or facades they put into place, McDonald's can never escape that stigma.

In addition, from a national health perspective, McDonald's decline is good. As people pursue healthier eating options, cases of obesity will surely decline. Fast food restaurants contribute significantly to obesity and heart disease in the population. McDonald's will surely introduce greener, healthier products. With the entire industry trying to become healthier, everyone benefits.

Disclosure: None