3 problems dragging down McDonald's

What's wrong with McDonald's (MCD)? 

The world's largest restaurant chain has seen disappointing sales for five straight quarters, reporting a fourth-quarter profit Thursday that barely moved from a year earlier. The company's stock price is sluggish, rising just 7 percent since CEO Don Thompson took over in 2012, while the Dow Jones industrials are up 27 percent in the same period.

The pressure on Thompson to deliver returns ratchets up with every poor quarter, and soon the calls for his ouster could grow louder.

  This isn't the kind of performance you'd expect from a company that has for years been a business leader. In the past, McDonald's seemed to do no wrong, offering a steady sales growth and dividend yield that investors came to rely on. 

Even now, investors are still holding out hope. McDonald's shares were down slightly on Friday at $94.71, down from a high of $103 last April. Although investors still appear to be giving the chain the benefit of the doubt, McDonald's faces pressure on three main fronts:

Weak demand. Yes, the U.S. economy is bouncing back, and the stock remains frisky. Upper-income Americans are spending like crazy on televisions, luggage, jewelry and watches. But most people are finding the recovery tougher going. The middle class face a tough job market and higher payroll taxes, while cuts in food stamps and other assistance programs have hit the poor hard.

Such financial hardships affect McDonald's patrons, limiting the company's ability to adjust its business to drive growth.

"We don't have as much pricing power," Thompson said last July. "And as long as inflationary rates are lower and as long as GDP growth and consumer discretionary spending is softer, we're not going to move forward and take a lot of price because we know that it would mean guest count erosion longer term."

Stronger competition. McDonald's has the McRib, but then Burger King (BKW) started selling a new barbecue rib sandwich for $1 last fall. Wendy's (WEN) is selling spicy chipotle burgers and chicken sandwiches for about the same price. McDonald's doesn't have anything like that on its new "Dollar Menu & More" offering.

  Wendy's, in particular, is making a run for the high-end customer with premium items such as the Pretzel Bacon Cheeseburger, one of its most popular limited promotions in years, and the brioche bun.

Poor management. So what could McDonald's do with budget-strapped customers and rivals rolling out tasty promotions? It made a major mistake in the form of Mighty Wings -- surprisingly spicy chicken wings priced at $1 each. Needless to say, they didn't go over well with some customers. Sales were reportedly 20 percent below expectations, and McDonald's was left with 10 million pounds of wings in frozen storage.

Franchisees are also struggling with all the new items on the menu, which end up slowing down service across the board. In a survey last year of 25 McDonald's franchisees, some said the restaurants had become an "operational nightmare," The Huffington Post reports. New, pricey products such as the McWrap took too long to make, the owners said. 

"It's gotten to the point where the operation has kind of broken down and that's all a symptom of the complication of the menu," a former McDonald's store owner told Bloomberg News last year. "They can't make the food fast enough."

  • Kim Peterson

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