McDonald’s Corporation (NYSE:MCD) same store sales have slowed in The United States. Some of that stems from increased competition and some from a still languishing economy. However, the company isn’t sitting still, with Bloomberg reporting that a major menu overhaul could be in the cards. That should make shareholders happy.
Too Many Choices
While the menu has increased in size, however, it’s important to remember that more options helped drive a run of success. Indeed, a stale menu can lead customers to try other food outlets. A constant stream of fresh, new items keeps customers coming back for more. That’s why chains from McDonald’s Corporation (NYSE:MCD) to Burger King Worldwide Inc (NYSE:BKW) have focused on livening up their menus.
Zombie Food
The problem, however, may not be bringing out too many new items, but how long a new menu item lives on. The Wendy’s Company (NASDAQ:WEN) benefited for years from bringing out a spicy chicken sandwich for short periods of time. McDonald’s Corporation (NYSE:MCD)’s menu items often come in and stick around for a long time. Thus, menu bloat.
Of course Wendy’s has been through a disastrous string of mergers and spin offs that have left the company’s image tarnished. Its shares, meanwhile, are hovering in the single digits. Still a core menu supplemented by short-lived special items is a classic way to keep a menu fresh and keep it pared down. The Wendy’s Company (NASDAQ:WEN)’s recent problems weren’t so much caused by its menu as it was by corporate actions.
The logic of a pared down menu is taken to the extreme at Chipotle Mexican Grill, Inc. (NYSE:CMG). This concept was once controlled by none other than McDonald’s Corporation (NYSE:MCD). Although Chipotle has a long list of fresh items to put into each meal it creates, the list of dishes is limited to just a handful. That allows the made fresh in front of you concept to work, since the assembly line would bog down if there were too many choices available.
Small is Better or New is Better
Interestingly, The Wendy’s Company (NASDAQ:WEN) has always tried to differentiate itself on quality. That became harder as fast-casual restaurants like Chipotle Mexican Grill, Inc. (NYSE:CMG) started to pop up. The new brands, which include burger places, have stolen market share from fast food and casual restaurants as they have expanded. They have also made it harder for an old brand like Wendy’s to offer higher quality fare at higher price points.
Simple menued Chipotle has seen its shares run up almost 300% over the past five years. And, despite a big pull back in the middle of 2012, the stock has resumed its upward climb. However, the company’s trailing price to earnings ratio is around 40, which is high. So growth has to keep going if the shares are going to continue heading higher. As a new concept, new store openings can probably support that P/E. However, investors should be ready to jump ship once growth slows since the P/E is likely to compress quickly if customers grow tired of the Mexican themed chain.
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And that points to the big difference between Chipotle and McDonald’s or Wendy’s. Chipotle’s entire concept is new. It is in a new quality range, too. So, the menu size comparison doesn’t make complete sense. Chipotle and its fast-casual brethren are like the Cabbage Patch Dolls of the food industry right now. Everyone wants to try the new thing.
However, it is interesting that McDonald’s divested Chipotle just before the burger joint’s menu expansion began. It’s also notable for Wendy’s shareholders that the fast-casual concepts have forced it to step up its game. It’s in the midst of a store revamp to help change its image and move it closer to the fast-casual space. Early same store sales results suggest that the moves may be gaining traction. That might interest more aggressive investors looking for a turnaround play.
Back to the Burger Giant
So, the jury is out on the issue of the size of McDonald’s Corporation (NYSE:MCD)’s menu. What should make investors happy about the proposed menu tinkering, however, is that, despite the current headwinds, McDonald’s is working to keep its menu fresh. For example, even as it talks about axing some menu items, it is bringing out new ones like egg white breakfast sandwiches.
And don’t forget the company’s scale and global reach. In fact, market share is the name of the game in developed markets, not growth, for a company the size of McDonald’s. That’s a tough game, so rough patches should be expected. Growth in emerging markets is more likely to lead McDonald’s growth and earnings increases.
With a P/E less than half Chipotle’s and an around 3% dividend yield, McDonald’s is a solid option for income investors and those with more conservative investing tastes. Don’t look at the menu issue as a negative because it just means the company’s leaders are still working hard to please customers.
The article A Leader Willing To Change originally appeared on Fool.com and is written by Reuben Brewer.
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