As Competition Heats Up, Can McDonald's Adapt?


Fast-food juggernaut McDonald's has had a slow first half the year, and competitors Burger King Worldwide and Wendy's continue to turn up the heat. Consider that Wendy's is rebranding itself with a new logo, uniforms, menu items, and restaurant renovations as it becomes more of a hybrid chain between fast food and the newer fast-casual restaurants. If McDonald's can't respond to competition and changing market preferences, it won't remain the No. 1 fast-food chain for long. Let's take a quick look at how far comparable-store sales have fallen from last year, and what McDonald's plans to do about it.

August sales
McDonald's just released sales figures for August, and comparable store sales increased 1.9% globally, beating analyst estimates. Breaking it down by the segment, the U.S. was up 0.2%, and Europe was up 3.3%, while Asia/Pacific/Middle East and Africa, or APMEA, was down 0.5%. That was good enough to beat estimates for the month, but looking at year-to-date figures paints a darker picture: Global comparable store sales are up only 0.4% through August, compared with 4.4% last year.

One of the reasons sales have slowed at the Golden Arches is that the consumer is increasingly searching for healthier foods. Another reason is that McDonald's has failed to step consumers up from the Dollar Menu. But perhaps the biggest reason sales have faded is that McDonald's is failing to appeal to my generation: the millennials.

Ronald McDonald never dies
While the Happy Meal lives on, Jack in the Box dropped its kids' menu in 2011, and Taco Bell recently removed all kids' meals and toys. "Taco Bell will shock the fast-food industry on Tuesday by announcing plans to drop kids meals and toys at all of its U.S. restaurants." CEO Greg Creed told USA Today. "The future of Taco Bell is not about kids meals. This is about positioning the brand for Millennials."

Kids' meals accounted for an incredibly small portion of Taco Bell's sales, but the important aspect was positioning its brand for my generation. McDonald's won't remain the No. 1 fast-food chain for long if it alienates the millennial generation, which is now 80 million consumers strong with an estimated purchasing power of $200 billion annually. In March, Ad Age found that McDonald's didn't even rank among the millennials' top 10 restaurant chains, a bad sign if McDonald's can't adapt, soon.

Moreover, there's another aspect most agree on regarding my generation: "They're 80 million [people] but they're influencing the next 80 million, both younger and older," said Gary Stibel, CEO at New England Consulting Group, according to Ad Age.

McDonald's response
There are two main problems McDonald's must fix going forward: menu items and store appearance. Regarding the latter, check out McDonald's attempt to modernize its stores to attract the millennial generation:

The interior of a more modern McDonald's. Photo: McDonald's.

It's an impressive change, and McDonald's plans to spend more than $3 billion to open 1,500 modern restaurants globally and to reimage another 1,600 locations. Regarding menu items, McDonald's is releasing a few updates. One big item hitting the menu is called "Mighty Wings," which the company hopes will attract the same crowd that frequents places such as Buffalo Wild Wings.

McDonald's also introduced the McWrap, which is also aimed at my demographic. "McWrap offers us the perfect food offering to address the needs of this very important customer to McDonald's," says the fast-feeder's memo, according to Ad Age. It continued, "Our customers are consistently telling us, particularly millennials, they expect variety, more choices, customization, and their ability to be able to personalize their food experience."

McDonald's is a juggernaut and has a huge competitive advantage with its low-cost position, making its profits large and sustainable. The company is also very consistent at returning value to shareholders through dividend increases and share buybacks. That being said, if the company can't prove it can adapt its menu and restaurants to attract new generations, it could be a bumpy ride for investors over the next decade.

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Fool contributor Daniel Miller has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide and McDonald's and owns shares of McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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