4 reasons McDonald's is hurting

How can McDonald's (MCD) fix its troubled business?

That question has generated intense debate on Wall Street as the fast-food giant continues to see sales tumble. The company acknowledged its problems Tuesday, saying it needs to make major changes to its business to survive.

"The internal factors and external headwinds have proven more formidable than expected and will continue into the fourth quarter," chief executive Don Thompson said Tuesday in a conference call with investors. "These significant challenges call for equally significant changes in the way we do business."

But where can the company start? Nearly every segment of its business is under fire. Here are some of the problems McDonald's is struggling with:

Younger customers are fleeing. Millennials in particular are heading to Chipotle Mexican Grill (CMG), Five Guys and other chains that are perceived as healthier. Parents also appear to be looking for alternatives for their children's meals.

Activists have criticized the chain for using Ronald McDonald to market food to children. "McDonald's biggest problem is its kid-targeted marketing," said Sriram Madhusoodanan, director of the Value [the] Meal campaign at Corporate Accountability International, a watchdog group that aims to stop corporate abuse.

Chick-fil-A is surging. Mark Kalinowski, an analyst with Janney Capital Markets, thinks Chick-fil-A could be one of the top five restaurant chains in the U.S. by the end of the decade.

"What's remarkable is how Chick-fil-A has been able to overtake McDonald's on the family front," he wrote in a report Tuesday. "It did so without a massive marketing machine, with no product tie-ins with movies or television programs and without the toys." Kalinowski has a "neutral" rating on McDonald's stock.

Its drive-thru is slowing down. Most of the fast-food industry is seeing slower service, particularly at drive-thrus, but McDonald's stands out for getting slower every year, according to a study from trade magazine QSR. "At least part of the issue is a bloated menu," Kalinowski adds.

A troubled Chinese supplier. Sales in China have cooled as diners grew concerned that one of the company's longtime suppliers was selling expired meat.

Investors have watched McDonald's sales and profit all year, trying to get a sense of the company's momentum. Tuesday, the numbers again proved disappointing, with quarterly profit falling to $1.07 billion from $1.52 billion a year earlier. Revenue dropped 5 percent to just under $7 billion. The numbers came in below the already rock-bottom expectations from analysts.

Shares fell by less than 1 percent in response to close at $91.01. The stock price has been steadily dropping from around $102 in May.

McDonald's announced several changes Tuesday it would make to its business. The chain will upgrade its menus and stores. The company will improve service, it said, as well as add modernized payment systems and digital ordering capabilities. It has announced a new president for its U.S. operations.

Will these changes be enough to revive business? It's clear the company will miss its 2014 target of operating income growth in the 6 percent to 7 percent range. But analyst R.J. Hottovy at Morningstar is optimistic, saying the company has bargaining clout with suppliers, a solid franchisee system and one of the strongest brands in the world.

"It will take time to reposition McDonald's to better compete," Hottovy wrote in a recent note. "We believe the company can gradually return to longer-term goals."

  • Kim Peterson

    Kim Peterson is a financial journalist covering business and the economy. She has written for several online and print publications, including MSN Money and The Seattle Times.