McDonald’s (MCD) is the world’s largest fast food chain by far, with operations in 119 countries. It features a consistent menu tailored to popular tastes and local preferences, supplemented with seasonal offerings timed to drive increased visits. Catering to rising living standards and longer work hours, the restaurants and cafes offer quick service, affordable pricing, and quality food and beverages.
The company owns many of its restaurants outright. Others are owned by franchisees or affiliates who contribute rents, franchise fees, and royalties to the McDonald’s bottom line. MCD also owns and leases real estate in connection with the restaurants, and trains and supplies franchisees.
The quick-service restaurant niche is crowded. McDonald’s competes with YUM Brands (YUM), parent of Taco Bell and KFC, as well as with privately-owned Subway, Wendy’s(WEN), Burger KING(BKC), and Jack in the Box(JACK). Sonic(SONC), private In-N-Out Burger, and Biglari Holdings (BH) subsidiary Steak and Shake are among many other competitors.
Dominos (DPZ) and Papa John’s (PZZA) also serve a somewhat similar customer. Since McDonald’s expansion into coffee drinks in its McCafe, it also competes with Starbucks(SBUX).
The company has many competitive advantages, however. As the largest business in its industry, it has a strong hand in dealing with suppliers and services. In addition, small entrepreneurs looking for a business opportunity know the company maintains the largest and best publicized fast food brand.
Some people hate McDonald’s though, as a company and as a symbol. It is blamed for the loss of the Amazon rainforest, because of its use of oil made from soybeans grown in Brazil. It’s also blamed for childhood obesity, and its workers are slandered as people with McJobs.
McDonald’s counters these accusations with good publicity, but also with alterations to its menus and corporate behavior. It now offers popular fruit smoothies, salads, and sliced apples as well as the reviled but very popular fries. Products are sold in low-waste recyclable containers at many outlets. In ads, the company points out that many successful people first entered the working world with a McJob.
As an economical dining choice, McDonald’s is recession resistant. As the recovery progresses, however, some of its customers might switch to fast casual restaurants like Chipotle(CMG), spun out of McDonald’s in 2006. The eco-conscious designer coffee beverages and real fruit smoothies at the McCafes are one corporate initiative to improve Mickey D’s image as well as maintain its customer base.
In the Q3 conference call of October 21, 2011, Vice Chairman and CEO Jim Skinner said that McDonald’s was expanding its McCafes globally. With McCafes throughout Europe, including 1400 in Germany and 650 in Australia, the company planned to have 250 in China by the end of 2011. He said McCafe beverage sales increased by “16 percent over last summer’s strong numbers.”
Breakfast is also doing well in China he said, “Achieving double-digit comparable sales increases and today has reached over 8 percent of sales.” In America breakfast is 25 percent of sales, and includes healthy items like oatmeal and fruit salad with walnuts. He closed by saying, “We stay focused on what we can control, staying committed to our winning plans, and delivering an exceptional experience for our more than 64 million customers around the world every day.”
Then CFO Pete Benson spoke of, “Significant increases in comparable sales, market share and operating income.” He did complain of higher costs hurting margins, however, particularly commodity costs. Beef costs, he said, might rise as much as 5 percent for the year.
However, he said, “food-at-home inflation is rising faster than food-away-from-home, which might allow for additional pricing actions in the near term. We will continue to evaluate additional price increases in light of this inflationary environment…”
In the Q&A, analysts inquired about the effects of inflation and austerity in Europe. CEO Jim Skinner replied, “I think the standard of living and the discretionary income has to be impacted very, very severely for us to start to feel that impact at the McDonald’s front counter and drive-thru.” He feels that his company’s supply chain and structure may mitigate the impact of price inflation for McDonald’s, though other companies may not be so well positioned. He said, “It’s not the case for everybody.”
The Q4 conference call is scheduled for January 24, 2012.
Though McDonald’s is huge, it may well have more growth ahead. Global trends are in its favor. According to a study by the USDA, the amount Americans spent on food eaten away from home grew from 34 percent of their food budget in 1974 to about half in 2004. With increasingly busy lives, this trend shows no sign of reversing anywhere in the world.McDonald’s is likely to remain a popular break and an affordable family treat.
The stock has moved up with the company’s fortunes. A member of the Dow Jones Industrial Average, it is up more than 230 percent since 2000, and up about 35 percent over the past twelve months. The current yield is 2.79 percent and the stock has increased its dividend every year since 1976, making McDonald’s total return a true growth story.