The Other Clown Shoe Drops at McDonald's

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Sitting figure of Ronald McDonald in Thailand with departing customers. Thailand S. E. Asia
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Things are going from bland to worse at McDonald's (MCD).

The world's largest burger chain capped off what it rightfully classified as a "challenging" year on another ho-hum note with Thursday morning's quarterly report. Global comparable sales declined as a decline in store traffic was more than enough to offset the fact that patrons were spending more on average.

The 0.1 percent downtick in worldwide comparable sales may not seem like much, but things are degrading at a more dramatic level closer to home. Stateside comps plunged 1.4 percent during the final three months of 2013.

Something's just not right at McDonald's.

A Quarter That Floundered

Another uninspiring quarter at the fast food giant is no longer a surprise. McDonald's ended an impressive nearly 10 year streak of positive monthly comparable sales in late 2012, and business has been sluggish ever since.

Opinions vary on the reasons for the iconic chain's lackluster performance. Some argue that it shouldn't have strayed from the Dollar Menu that increased its magnetism to cost-conscious diners. Others suggest that it was the push to offer higher-priced entrees and beverages -- adding premium chicken-topped salads and fancy coffee drinks to the menu -- that alienated its core customers.

There may be some truth to both theories, and McDonald's has tried to address them by introducing the Dollar Menu & More late last year -- highlighting the popular low-cost offerings, but enhancing it by tacking on some higher-priced value items. The move should have rallied thrifty loyalists around the chain, but the decline in store traffic during the fourth quarter and all of 2013 is proof that it wasn't enough.

A Costly Casual Culture Clash

The surprising decline in traffic at McDonald's comes at a challenging time for the fast food industry. But not every burger flipper is smarting.

A week earlier, Wendy's (WEN) had posted encouraging preliminary results for the same three months, with North American comps up 3.1 percent for company-owned stores and a resilient 2.8 percent increase at franchised locations.

However, another thing that's likely holding McDonald's back is the fast casual revolution where patrons are flocking to Chipotle Mexican Grill (CMG) and its peers, which serve up better quality fresh food at slightly higher prices, and with the same speed and convenience.

It's not as if McDonald's didn't see this coming. It spotted Chipotle's success early, investing in the concept when it had just a handful of locations in Colorado. McDonald's at one point owned a majority stake in Chipotle, giving it a position of market leadership in the promising niche a decade ago.

However, McDonald's and Chipotle didn't have the same culture. Incorporating Chipotle's "food with integrity" mantra would've been costly at the burger behemoth. It chose to spin off Chipotle, completely divesting itself of its stake shortly after that.

Things could've been very different for McDonald's if it had held onto with Chipotle when it went public at $22 in 2006. McDonald's shareholders have seen their investment more than triple once you factor in dividends since Chipotle's IPO. But Chipotle itself was a 23-bagger in that time.

Never Count Out the Clown

Naturally, McDonald's isn't going to fall apart and vanish. If Wendy's was able to turns its fortunes around with new products and some crafty market positioning, there's nothing to stop a juggernaut like McDonald's from eventually getting the balance right.

However, it's clear that after a sobering end to 2012 and a rough 2013 that McDonald's isn't doing enough. The Dollar Menu & More needs more. The limited-time product rollouts that the chain believes attracts folks seeking new experiences at McDonald's either haven't been enough or they haven't been the right products.

It's always a bad idea to give up on McDonald's -- especially given its juicy dividend yield of 3.4 percent as it trades near recent lows. But investors really won't have a reason to come back until the diners do.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and McDonald's. The Motley Fool owns shares of Chipotle Mexican Grill and McDonald's. Try any of our newsletter services free for 30 days.

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tudzco

Isn't McDonald's going to update the locations?...I read that somewhere...Anyway, one day a very busy location by me was there and the next day it was gone.. totally torn down...Hope they are planning a new one there and not moving to another location...The "Clown" is an American classic as far as I'm concerned....Some of my McD stock is up and some is down but I am planning to hang in there...

January 28 2014 at 6:00 PM Report abuse rate up rate down Reply
tsimpson2333

The mishandling of the economy over the last 6 years has a lot to do with it. If workers got a raise it could not be more than 2% and that does offset the increase in the P/R taxes and the health care costs. Many people got a raise only to find that they had less take home pay than last year. We need a complete change in our leadership---both R's and D' including the President. Next time someone with a lot more executive experience.

January 27 2014 at 12:22 PM Report abuse rate up rate down Reply