From Supersized to Super-Sighs: Is McDonald's Growth Era Over?

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McDonald's Golden ArchesThe 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.


Coming Home

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.

Counting McCalories

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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308 Comments

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hd93fxdwg

serve up food that is im someway palatable...
that stuff is crap..
never cooked osite... just reheated...
it is absolute garbage...
get a clue and serve food that is good to eat...
a$$ clowns...

June 14 2012 at 9:47 PM Report abuse -1 rate up rate down Reply
formybubu

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

So when did Goldman Sachs Downgrade Shares of Goldman Sachs. Never
So who gives the greedy Goldman the right since they won't even clean their house of crooks,
So they mess with other companies
now that is for the Clowns

June 14 2012 at 8:28 PM Report abuse +1 rate up rate down Reply
Nobear

too much michell obbama running her mouth about fast food chains, and now an other uber liberal mayor bloomburg of new york city. I love the golden arches french fries, more salt the better I say

June 14 2012 at 8:25 PM Report abuse rate up rate down Reply
krs

Wendy's, Burger King and local fast food outlets (Lottaburger and Whataburger) are far superior
to McDonalds-always have been. It is just that McDonalds was smart-gear your advertisement
to children. The children will demand the parents to go to the inferior place and eat the inferior
product because that is what the kids want. The only decent meals at McDonald's are their
breakfast menu products, everything else is mediocre or worse.

June 14 2012 at 8:10 PM Report abuse rate up rate down Reply
dbork43270

Sorry everyone-Maybe I didnt make my self clear. Trying to cook dinner, feed the cats and deal with this issue. Guests will now pay less at the counter for a beverage yet still will drink what and how much they want-of course in a smaller cup. There is always a way. Sorry once again gotta go fluff n fold now. lol

June 14 2012 at 8:02 PM Report abuse -1 rate up rate down Reply
yatcat49

Still enjot Mickey D's anytime over any other fast food. I find any of the burgers from BK too salty and Wendy's usually gets our order wrong.

June 14 2012 at 7:58 PM Report abuse +1 rate up rate down Reply
yatcat49

give me a Quarter Pounder with Cheese or a Big Mac anytime. Still lovin' them :- ))))).

June 14 2012 at 7:56 PM Report abuse +1 rate up rate down Reply
dbork43270

Hello=Does anyone get it. Sell smaller size drinks and make more money! Has Bloomberg ever worked in a restaurant? I doubt it. Has anyone been to a McDonalds or Burger King lately? Its all the the soda you can drink once you buy the cup. The only thing thats going to change is that people will have to get up more often to refill. Has anyone heard from the major chains complaining about the new change. HELL NO!!!! They will now pay less and still drink as much. Great thought Bloomy. DAH. STUPID GOVERNMENT EMPLOYEES.....

June 14 2012 at 7:54 PM Report abuse +1 rate up rate down Reply
Bob

Funny....one of Huff Post's favorite targets again in their "news". What...no Walmart news today? LOL. That is what we get from the idiot immigrant owner of the Huff and Puff Post. Surprised they didn't have a picture of Mitt at McDonalds, and couldn't possibly put the hundreds of Bill Clinton they have on file!

June 14 2012 at 7:49 PM Report abuse +1 rate up rate down Reply
azcpa

Probably because it now costs over $4 for a fillet of fish! That's not in my budget.

June 14 2012 at 7:49 PM Report abuse +2 rate up rate down Reply