McDonald’s Corporation (NYSE:MCD) has been radically overhauling its menu in recent weeks. After teasing the possibility of 24-hour breakfast, the fast food chain has begun to offer a few breakfast items after midnight.
Meanwhile, McDonald’s has added several new items to its menu, while at the same time getting rid of others.
But why? What are investors to make of the company’s food shakeup?
McDonald’s Corporation (NYSE:MCD) has a been great stock in recent years. Since 2008, shares are up over 70%. Moreover, the company pays a reliable dividend and has a sound, proven business model. (I’ve highlighted it as an ideal stock for a retiree seeking income.)
But despite its strong historic performance, McDonald’s Corporation (NYSE:MCD) could be in for a grim future.
In particular, McDonald’s Corporation (NYSE:MCD) is facing a generational challenge — today’s young adults aren’t the company’s biggest fans.
At the same time, a number of new, disruptive competitors — like Chipotle Mexican Grill, Inc. (NYSE:CMG) — have emerged. Meanwhile, old foes like Burger King Worldwide Inc (NYSE:BKW) and Yum! Brands, Inc. (NYSE:YUM)’ Taco Bell have undertaken their own turnaround efforts.
Millennials aren’t fans of McDonald’s
McDonald’s Corporation (NYSE:MCD) has a millennial problem. The millennial generation, roughly defined as those born between the years of 1980 and 2000, does not particularly care for McDonald’s.
McDonald’s is aware of this. In an internal note, the chain’s management admitted that it does not rank among millennials’ top 10 favorite restaurants. In general, millennials tend to prefer Subway and Taco Bell.
In order to counteract this trend, McDonald’s launched the McWrap — a premium chicken sandwich that offers a degree of customization greater than McDonald’s other menu items.
At the same time, McDonald’s has added an egg white McMuffin and a blueberry pomegranate smoothie — items that should make McDonald’s menu slightly more appealing to health-conscious millennials.
The rise of new fast food
McDonald’s is also facing competition from completely new fast food chains, examples of which include Panera Bread Co (NASDAQ:PNRA), Five Guys, and Chipotle Mexican Grill, Inc. (NYSE:CMG).
Chipotle has experienced explosive growth in recent years, and shares have soared nearly 300% in the last five.
In fact, some might see Chipotle’s growth as being too explosive. Fund managers David Einhorn and Jeff Gundlach have both argued that Chipotle’s stock is overvalued.
At a conference last October, Einhorn argued against Chipotle on the basis of valuation and competition. He noted that Chipotle, with a price-to-earnings ratio well over 30, was richly valued. Further, he argued that Taco Bell’s new Chipotle-esque menu items (more on that later) would pressure the burrito maker.
Gundlach made a similar argument early in May. He called the concept of a “gourmet burrito” oxymoronic, and argued that Chipotle’s near 40 PE is excessive.
Be that as it may, while McDonald’s may be struggling with millennials, Chipotle is doing quite well with the group.
According to a study done by LEK Consulting, Chipotle may be millennials’ overall favorite restaurant. Beyond its unparalleled customizability, Chipotle projects an image of higher-quality, non-processed food.
At the same time, it embraces an interesting advertising strategy. That is to say, no strategy at all. Chipotle does not do TV ads, and in fact, has argued that to do so would lessen its appeal with millennial consumers.
Reinvigorated competitors
McDonald’s isn’t the only fast food chain revamping its menu — many of them appear to be in the midst of a major transition. But in particular, Taco Bell and Burger King Worldwide Inc (NYSE:BKW) are doing some serious remodeling.
Taco Bell has gone in both directions. On the one hand, it created the “Cantina Bell Menu” — premium, more expensive food seemingly designed to compete with Chipotle. At the same time, it’s launched the massively successful Doritos Locos Taco — bolstering its image as the premiere location for late-night snacking.
The Doritos Locos Taco has arguably been the most successful fast food item ever. Taco Bell’s management has said the taco is responsible for 15,000 new jobs.
But should an investor dump McDonald’s for Yum! Brands, Inc. (NYSE:YUM)? Unfortunately, Yum Brands is much more complex than just its Taco Bell operation — it owns other chains including KFC and Pizza Hut.
While Taco Bell has been firing on all cylinders, KFC has stumbled abroad. KFC is China’s largest fast food chain.
That was once a source of great growth for the company, but now it might be holding it back. Bird flu scares have affected sales, while the Chinese government has come after the company for health violations.
Because of its large KFC operation in China, Yum Brands is seen as somewhat of a play on the Chinese consumer. Shares of Yum Brands will typically rally or sell-off on days when there is significant Chinese economic news.
Burger King has notably less Chinese exposure than Yum Brands, but it too has been trying to reinvent itself.
Burger King recently emerged from private equity ownership. While private, its owners redesigned the chain’s menu, offering unique foods like sweet potato fries and veggie burgers on a seasonal basis.
Bill Ackman’s Pershing Square owns a big portion of Burger King, and the activist investor has given a presentation on the company in the past.
According to Ackman, Burger King has stumbled in the past because of its limited appeal. Specifically, Burger King’s menu and advertising has appealed only to young adult males. By reinventing its food and changing its advertising, Burger King should be able to attract other demographics.
Ackman believes that shares of Burger King could, if the turnaround goes according to plan, hit $45 by 2016.
Can McDonald’s weather the storm?
In many ways, McDonald’s is facing some of the biggest challenges it has seen in years. New fast food chains, as well as remodeled old ones, are threatening to rob McDonald’s of key customers — particularly among the millennial generation.
McDonald’s decision to shake up its menu is in direct response to those challenges. New items like the McWrap are intended to appeal to millennials, while additional menu tweaks should generate interest and help McDonald’s beat back the advance of rivals like Chipotle, Taco Bell and Burger King.
McDonald’s still seems to be one of the safer stocks out there, however, anyone invested in the company should keep a close eye on the evolving fast food landscape.
Joe Kurtz owns shares of Burger King Worldwide (NYSE:BKW). The Motley Fool recommends Burger King Worldwide, Chipotle Mexican Grill (NYSE:CMG), and McDonald’s. The Motley Fool owns shares of Chipotle Mexican Grill and McDonald’s.
The article McDonald’s Continues to Shake Up its Menu originally appeared on Fool.com and is written by Salvatore “Sam” Mattera.
Salvatore “Sam” is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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