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.
