5 reasons McDonald's has indigestion

The problems are piling up for McDonald's (MCD), with the world's largest restaurant finding itself in an unusual position -- having to convince shareholders that it's still a good investment.

McDonald's shares, for years a favorite on Wall Street, are down 3.4 percent this year, underperforming both the Standard & Poor's 500 index and the stock of rivals such as Burger King (BKW) and Jack in the Box (JACK). McDonald's sales in the U.S. have either been flat or negative for nine straight quarters, the longest it's gone without growth in its core market.

CEO Don Thompson underscored McDonald's doldrums during its recent earnings call by using the word "urgency" at least seven times in reference to the company's challenges. He took over as chief executive in 2012, succeeding the widely respected Jim Skinner, who had led the company for more than two decades.

Skinner introduced the McCafe in 2009, which was the last significant hit the chain has had in recent years. Since then, McDonald's has introduced a number of new menu items, ranging from Mighty Wings and Fish McBytes, none of which have proved a big bit with customers. In fact, McDonald's franchisees have complained that the chain's menu has gotten bloated, hurting customer service.

Thompson has vowed to slim down the menu. But that is only one of the many challenges facing the Golden Arches. Here are five issues giving McDonald's -- and shareholders -- indigestion these days.

1. Competition. Rivals have been eating McDonald's lunch, and breakfast, too. Same-store sales at McDonald's fell 2.5 percent in July, its third straight monthly decline. By contrast, rivals including Burger King, Wendy's (WEN) and Yum Brands' (YUM) Taco Bell recently are seeing rising sales at stores open at least a year. Healthier alternatives such as Chipotle Mexican Grill and "better burger" chains such as Smashburger are also gaining ground at McDonald's expense. Worse, consumers are thumbing their palates at McDonald's food. A recent Consumer Report's survey ranked McDonald's burger as the worst among its peers. Customers preferred Wendy's and Burger King over McDonald's in a Technomic survey.

2. Millennials. Companies are eager to attract customers aged 19 to 30 because they believe that younger patrons are more loyal than older people. But an internal McDonald's memo obtained by Advertising Age found last year that customers in this age group didn't list McDonald's among their top 10 favorite restaurant chains.

3. Customer service. McDonald's customer service is so bad that the fast-food chain told franchisees in a presentation leaked to the Wall Street Journal last year that service was "broken." The problem, many customers say, is that many McDonald's employees are "rude and unprofessional." One reason why McDonald's employees might be feeling stressed out is that the menu has grown too large in recent years. Thompson has vowed to improve service by making sure that the restaurants are adequately staffed during peak hours. Franchisees have also complained about having to pay increasingly higher fees as their profits decline.

4. China. Allegations in China that a food processor sold McDonald's and other fast-food outlets in China old meat appears to be hitting the company's results hard. Same-store sales in the Asia-Pacific, Middle East and Africa region fell 7.3 percent in July, far worse than the 0.5 percent decline that analysts had expected. McDonald's, which has about 2,000 restaurants in China, is scrambling to find alternative suppliers, according to the Wall Street Journal.

5. Labor issues. The National Labor Relations Board ruled last month McDonald's is a joint employer with its franchisees. Although McDonald's has vowed to fight the decision, that could make the company liable for the labor and other practices of its 14,000 U.S. locations. Meanwhile, pressure is building on McDonald's and other fast-food companies to raise workers' wages. Employees and labor activists have organized protests at fast-food restaurants around the world, and in the U.S. are calling for a minimum wage of $15 an hour.

  • Jonathan Berr

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