Let’s not understate things by saying that the last three years have been disappointing ones for McDonald’s Corporation (NYSE:MCD) and anyone who owns MCD stock. They’ve been outright dismal.
Revenue has stagnated, profit margins have begin to narrow, and MCD stock is currently priced right where it was in December of 2011 while the broad market has gained more than 60% since then.
Yes, the company has problems. In fact, they seem to be accumulating faster than the fast food giant can resolve them.
In no particular order, here are the top five headaches preventing MCD stock from being the powerhouse it used to be.
McDonald’s Has a New CEO
Chief executive officers come and go all the time. McDonald’s CEO Donald Thompson, however, only lasted for two and a half years and then “retired” at a relatively young 51 years of age. It doesn’t take a genius to recognize the Board of Directors simply saw things were getting worse rather than better, and felt forced to make what it knew would be a disruptive change.
While his successor — chief global brand officer Steve Easterbrook — is arguably the top choice for the position, current and prospective owners of MCD stock should be worried about the lingering damage that might take years to undo. Back-tracking repair work will only slow down the positive steps the company should be taking now, and, as was the case with Thompson, there’s no guarantee Easterbrook is the right fit.
Franchisees Are Hopeful, But Skeptical
To put it bluntly, Donald Thompson had the franchisees jumping through hoops, forcing managers and workers to reconfigure their daily operations, while also forcing restaurant owners to spend money that didn’t necessarily improve sales. Mandated giveaways and insisting on carrying poorly-selling items like McCafe espresso drinks are only a couple of examples.
That frustration is apt to prevent a franchisee from opening more units that may end up becoming money pits. Potential new franchisees are also steering clear of McDonald’s, hearing all the war stories about the increasingly difficult parent company. Some may even be mulling store closures. Easterbrook needs to fix it, fast, or things will only get worse for MCD stock.
On Wednesday, it was reported that a handful of labor unions along with anti-poverty activist group War on Want accused McDonald’s Corporation of illegally avoiding a total of €1 billion worth of taxes between 2009 and 2013.
The claim specifically suggests that the parent company funneled revenue generated all over Europe into a Luxembourg subsidiary with an office in Switzerland, and in so doing circumvented the bulk of any profit-based tax liability.
Though it’s not clear how much water the War on Want allegations hold, it’s still something of a black eye for a company that’s struggling with perception in Europe as much as it is domestically.
And, if the European Parliament’s Special Committee on Tax Ruling decides to dig deeper into the matter and determines that € 1 billion (about $1.1 billion) worth of tax is indeed due, it’s apt to take a toll on an already-pressured MCD stock. Never even mind the tainted reputation it will spur.
Contempt for Employees … Still
In all fairness to the McDonald’s Corporation, many of the recent employee-relations gaffes were the result of the backfiring of otherwise good intentions (like a handbook suggesting employees get a second job to make ends meet) or society’s love for pointing fingers at “greedy, faceless, capitalist companies.”
On the other hand, for McDonald’s to foster as many worker protests as it does, and to be the de facto poster child for company’s being completely out of touch with what it’s like in the real world, there has to be something significantly wrong with the way it handles its most important assets … and it’s not necessarily just a matter of higher pay.
It should be of concern to MCD stock owners because, when it comes right down to it, those same employees are the ones that act as the face of the company. Despite what McDonald’s says, it’s still nowhere near fixing its employee-relations problems. Enough consumers will steer clear until things change for the better on this front.
A Lack of Relevancy … Still
The No. 1 challenge that owners of MCD stock need to worry about isn’t exactly a new one, but its negative impact is picking up steam, judging from stalled sales and shrinking profit margins.
In simplest terms: Consumers no longer go crazy for its food.
Sure, prices are low at McDonald’s, and that in itself is a big draw. But prices are low at rival Wendys Co. (NASDAQ:WEN) too, and Wendys food isn’t usually of questionable quality or as haphazardly assembled as McDonald’s so often is. And, yes, the espressos are of adequate quality, but for a couple of bucks more — and often at a more convenient locale –– a consumer can find an even better espresso at Starbucks (NASDAQ:SBUX).
Healthy eating? Eaters can get a “real” wrap at the Chipotle Mexican Grill, Inc. (NYSE:CMG) down the street.
The point being: In its quest to be all things to all people, McDonald’s has become nothing to most people. This lack of identity has even trickled its way into day-to-day store operations, prompting overstaffed restaurants and multi-tasking that ultimately leads to poor service, which in turn leads to lost business.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.