The great recession was kind to McDonald's. While most companies took hits around 2008, the world's biggest fast-food chain's stock and earnings kept rising, and it's not hard to imagine why: When people have less to spend on food, the Dollar Menu becomes a staple.
That growth has leveled off lately, though. Last year was very soft for the company, and its stock dove 9 percent on Monday after reporting revenue and profits that fell below expectations. So what's undermining the Golden Arches?
Part of the decline is fierce competition from other chains like Subway, Taco Bell, Burger King, Five Guys, and Wendy's. Then there are challenges in overseas markets like China, where a chicken scare has decreased sales at chains that sell a lot of it, as well as rising commodity prices and currency volatility. But the bigger problem is that McDonald's core customer base -- older adults at the bottom of the income spectrum -- are having a hard time affording what they're selling. You can tell as much from the coded language on the company's latest earnings call:
"We’re seeing flatter declining IEO markets and ongoing competition chasing fewer guest counts as a result of less discretionary spending," said CEO Don Thompson. "We’ve been adjusting now for about the last couple of years relative to making sure we had solid value platforms...we don’t have as much pricing power. And as long as inflationary rates are lower and as long as GDP growth and consumer discretionary spending is softer we’re not going to move forward and take a lot of price because we know that it would mean guest count erosion longer term."
In other words, if they raised prices at all, they'd lose even more customers than they already have. Those who can afford to pay a little more are already moving to newer, fast-casual concepts, like Chipotle and Panera, or sit-down experiences that have gotten more cost-competitive, like Ruby Tuesday's and Applebee's. Those who can't are reasonably well served by microwaving something at home, rather than going out for a fish filet.
McDonald's has good reason for caution about moving beyond its value deals: It's been burned recently by doing so. In March, it axed some salad options, and a few months later dropped its poor-performing Angus beef burgers, while doubling down on the dollar menu items. NPD group analyst Bonnie Riggs says consumers might say they want healthier foods, but not necessarily when they're going to a place like McDonald's, which is known for cheap comfort. People eat at fast-food restaurants because of convenience and prices, not taste. On Monday's earnings call, there was no triumphant talk about sales of the McWrap, which BusinessWeek recently held up as an essential part of its strategy.
"People go to McDonald's for what that brand is known for," says Riggs. When NPD surveyed consumers to ask their primary reason for going to a restaurant, only 8 percent named health, and that hasn't budged in several years. "They're more likely to watch calories and sodas and fats and all that when they're at home."
That means it's difficult for McDonald's to move into a different market segment, and in the meantime, those who can afford to eat better are going elsewhere. It's still mainly popular among baby boomers, says Riggs, many of whom are now among the long-term unemployed or facing shrinking retirement accounts. That doesn't mean the company's on the brink of collapse -- there are certain benefits that come with having 20 percent of global market share. But its future growth, tied to the fortunes of the American lower class, appears boxed in.