The world’s largest restaurant chain is showing signs of tarnish on the Golden Arches.
Goldman Sachs downgraded shares of McDonald’s (MCD) on Wednesday morning, as analyst Michael Kelter slashed both his buy rating and price target on the burger giant.
Challenges overseas and resurgent competition have Mickey D’s reporting a slowdown in growth, and that’s probably not going to turn around anytime soon.
Last week’s report was sobering. McDonald’s saw worldwide comparable-store sales at its eateries rise by a mere 3.3% for the month of May. That’s a positive number, but it’s far slower than the growth that investors were expecting; competitors are eating Ronald’s lunch in Asia.
The world, apparently, isn’t singing “I’m lovin’ it” along with the chain’s most recent jingle.
A World of Hamburglars
Investors have approached McDonald’s as a global play, and rightfully so. The stateside market’s already pretty saturated with Golden Arches. Where ever you are as you read this, you’re probably within a mile or two of one of the chain’s 33,500 restaurants.
The bullish thesis for investors involves conquering the rest of the world, even though McDonald’s already has a presence in 119 different countries. But what if the rest of the world proves to be less of an opportunity than the company’s own home turf?
That’s not a hypothetical question. The rest of the world didn’t show the Quarter Pounder maker much love last month. Europe comps rose just 2.9%, and you know things are going to get uglier as the region’s sovereign debt crisis plays itself out in the coming months.
Surely the rest of the world has to be doing better than Europe? Well, not for McDonald’s. The region encompassing Asia, the Middle East, and Africa actually saw its comparable-store sales fall by 1.7% in May.
Competition from other global fast-food chains and local favorites is eating into the restaurateur’s potential. Even in Asia, a market that other American chains — notably Yum! Brands’ (YUM) KFC — have exploited in the past, the company has had to lower prices to lure back diners.
The regional winner for McDonald’s was the good ol’ U.S. of A., where the average restaurant that’s been open at least 13 months was treated to a 4.4% increase in sales. This may seem encouraging, but let’s break down why sales have been so strong here.
The industry leader’s expansion of its menu — most recently with flavored frozen lemonades, smoothies, and fancy coffee drinks — has paid off in recent months.
However, we live in a copycat world. The latest marketing campaigns by its two nearest rivals find Burger King and Wendy’s (WEN) promoting their new smoothies and frozen treats.
The massive menu makeover two months ago at BK was lampooned by many as a total McDonald’s rip-off. The fruit smoothies, caramel frappes, and snack wraps were essentially lifted off the McDonald’s menu. But while imitation is the sincerest form of flattery, it isn’t good for McDonald’s investors.
Then you have emerging trends toward healthier dining habits.
New York City Mayor Michael Bloomberg may have drawn a few chuckles with his move to ban the sale of sugary soft drinks in sizes larger than 16-ounce servings in the city’s restaurants, but McDonald’s was quick to counterattack.
“We trust our customers to make the choices that are best for them,” the world’s largest restaurant chain tweeted in response, but that’s not entirely accurate.
The fast-food behemoth backed off from actively promoting supersized meals after the documentary Supersize Me cast the chain in a bad light. More recently, Ronald McDonald’s pals caved in to activist groups battling childhood obesity by adding apple slices to Happy Meals and shrinking the serving size of fries.
If soft drinks become the new battlefield, McDonald’s is going to be in a world of hurt. Sodas represent a high-margin item for the company. Every time a penny-pincher adds a soda to a low-margin Dollar Menu sandwich, McDonald’s wins. If that same patron picks water or a lower-margin beverage instead, it loses.
These days, it’s gourmet burger shops and regional faves like Five Guys and In-N-Out that are one an expansion track; the days of heady growth for the Golden Arches are over. When analysts see net sales climbing just 3% for the entire chain this year, it’s time for investors to move on.
Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. Motley Fool newsletter services have recommended buying shares of McDonald’s.
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