Walmart and McDonald's Earnings Prove Price Isn't Everything

Paul SakumaThis McDonald's is inside a Walmart, and both companies are having trouble.

Cheap isn't what it used to be. Two of the country's iconic havens of thrift -- discount retail giant Walmart (WMT) and Big Mac daddy McDonald's (MCD) -- are struggling. Sales have been slipping, suggesting that low prices aren't enough to woo consumers anymore.

The slide at McDonald's isn't all that difficult to digest. "Better burger" chains are popping up everywhere, and fast casual has replaced fast food as the growth category in the restaurant business. Walmart's woes are trickier to explain. It continues to offer low prices on everyday items, yet it has now posted five consecutive quarters of comparable-store sales declines at its U.S. stores.

Sam Walton Wouldn't Like This

The world's largest retailer posted flattish sales growth and a larger-than-expected decline in profitability in its latest quarter.

Walmart's report blames "severe weather" like so many retailers have been doing lately, but the odd thing is that this quarter covers the 13 weeks ending on May 2. December and January -- the two months when much of the country was plagued by harsh snowstorms that discouraged shoppers -- were part of Walmart's prior quarter. Some of the bad weather carried into early February, but either way, we're still talking about five straight quarters of negative comps. It's not just the weather.

The key to Walmart's low prices is that it is a technology company in disguise. It arms suppliers with real-time sales data to keep inventory turning quickly, and its data-driven platform -- that cost $4 billion to develop -- makes sure that it's stocking what shoppers want to buy. It passes on the savings of smarter stocking decisions and greater inventory turnover to shoppers. For a while, this couldn't miss. But the Internet has changed everything.

While other brick-and-mortar chains can't compete with Walmart's pricing, (AMZN) can. Walmart has done the smart thing by pushing into groceries and timely items, but Amazon's already testing out a grocery-delivery platform.

If Walmart finds that it can't compete on price and it doesn't have the "cheap chic" distinction that makes it as cool as rival Target (TGT), it will be hard to return to its days of heady growth.

Hold the Catch Up

McDonald's reported disappointing financial results last month, stretching its streak of negative comps at stateside stores to three quarters. The burger chain missed Wall Street's sales and profit targets for the period.

%VIRTUAL-article-sponsoredlinks%McDonald's is at the wrong end of the fast casual craze. A growing number of successful competitors offer the quick-service convenience of fast food but specialize in the higher quality eats found at casual dining establishments. Chipotle Mexican Grill (CMG) is championing that trend, and it's sadly ironic that McDonald's once owned the fast-growing burrito chain, which posted industry-leading comps growth of 13.4 percent during this year's first quarter.

McDonald's has been expanding its menu, trying to cash in on the "better burger" trend. Unfortunately, traffic counts continue to decline. Rival Burger King Worldwide (BKW) managed to post positive comparable store sales during the same first three months of the year while McDonald's clocked in with a 1.7 percent decline.

Between customers willing to pay a little more for better food and McDonald's alienating its core base of bargain seekers by trying to spruce up its menu, the chain needs to realize that it can't be all things to all people.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends, Burger King Worldwide, Chipotle Mexican Grill and McDonald's. The Motley Fool owns shares of and Chipotle Mexican Grill. Try any of our newsletter services free for 30 days.