McDonald's seeks to supersize its growth

Facing new competition across the fast-food spectrum, the burger pioneer is searching for a new hit.

By MSN Money Partner Apr 4, 2014 12:38PM
A McDonald's employee prepares an order at a McDonald's restaurant on April 19, 2011 in San Francisco, Calif. (© Justin Sullivan/Getty Images)By Ryan Derousseau, Money Magazine

The Golden Arches haven't shone for investors lately.

Over the past 12 months, McDonald's (MCD) stock has returned less than 3 percent. That compares with an average 21 percent return for restaurant stocks. 

Part of the problem is that growth is always harder for a big, mature business -- and with a market value of $93 billion, McDonald's is larger than its two biggest rivals -- Starbucks (SBUX) and Yum Brands (YUM) -- combined.

But the company has found ways to boost sales before. Job No. 1: Freshen up the menu.

Want wings with that?

McDonald's has had trouble finding new menu items that diners want.

McDonald's is no longer the basic burger, fries, and soda joint you remember from your childhood. Facing new upscale competitors, it responded by adding salads, wraps, and specialty coffees to the menu. This worked for a while: U.S. same-store sales climbed an annual average of 5 percent from 2003 to 2011, according to the brokerage Raymond James.

But lately the Oak Brook, Ill., company has struggled to find "the next big thing," says Edward Jones analyst Jack Russo. Recent new items like chicken wings haven't been a hit. (And until McDonald's settles on the right mix, the added complexity in the kitchen from new items "slows down the drive-thru," says Russo.)

U.S. same-store sales, though high at an average $2.5 million, have plateaued.

A partial bet on China

The country is important to the chain but still not the main event.

The U.S. market is well saturated, leaving McDonald's stuck fighting for share with both fancier brands like Chipotle (CMG) and low-cost Taco Bell fare. So an obvious avenue for future growth is the vast new Chinese market. Last year, 20 percent of the chain's store openings were in China.

But China remains a "smaller piece of a much bigger business," says Morgan Stanley analyst John Glass. He estimates the country represents up to 4 percent of profits.

Competitor Yum Brands, which owns Taco Bell, KFC, and Pizza Hut, gets a third of its earnings from China. That makes McDonald's a less risky play -- Yum saw a 4 percent drop in revenues last year in part because of a bird flu outbreak, for example -- but also means there's less potential for fast profit gains.

No shortage of cash

A steady flow helps the company pay back its investors.

Since 1976, McDonald's has consistently delivered cash back to shareholders in the form of dividends or share repurchases. Today the stock offers an attractive dividend yield of 3.4 percent. And there's every reason to think that the business will keep delivering a strong income.

McDonald's is built to generate consistent cash. When a franchisee launches a new store, the company often purchases the land and collects rent on top of franchise fees. So even in tough times, the "downside is relatively limited," says Westwood Holdings portfolio manager Matthew Lockridge.

If management can find that elusive new hit product and deliver improved growth, that plus a reliable payout may satisfy value-minded investors.

More from Money magazine

Apr 4, 2014 5:31PM
McDonalds needs to go back to the basics instead of concentrating on growth.  They have to keep adding these other terrible products because their bread and butter sucks.  Make a fresh tasting burger instead of one that tastes like it was squeezed out of a tube.  It doesnt have to be super high quality or anything healthy but it would be nice the burger patty wasnt as dry as shoe leather.
Apr 4, 2014 6:05PM

 I want to go into a McDs and purchase items for one dollar. I will not pay $1.26 for fries. I will only purchase the McDouble at the cost of $1.00. I have boycotted the restaurant because of their higher prices. I have found that I can find better prices at Burger-King, Tocco-Bell, Wendy's, Subway, and I purchase a foot long hotdog and a soft drink from ****'s for $2.54. Even the local mall has better deals on quick lunches now. I have found Legion posts have good home cooked food at low prices. Changing their menu and higher prices was good for us. We have found better quality food at various little holes in the wall and local food trucks. I have found a gas/conv. store that sells hotdogs for a dollar and coffee for a dollar. Look harder and you will find a better deal.

Apr 4, 2014 10:14PM
McDonald's is symbolic of everything that is wrong with corporate America: lousy jobs, greedy Executives, and garbage products.
Apr 5, 2014 10:48AM

I knew thirty years ago when they were talking about the U.S. turning into a service economy  we were in big trouble.

service = slave

Apr 5, 2014 10:29AM
McDonald's need (1) a third drive up window, so customers can return the wrong stuff they got at window #2 at window #3. (2) Need the return of the fries that made McD's famous not the garbage they sell today!! (3) Let's sell fresh burgers not burgers that have been sitting under their lousy heat lamps drying out!! (4) Let's do the math on your dollar menu, if you will sell a 20 piece nugget for $5, why not go back to the 4 piece nugget for kids for $1??
Apr 5, 2014 2:21AM
Don't eat at McD's anymore, haven't eaten there in a very long time, even the grand kids don't ask to go to McD's.
Apr 5, 2014 9:09AM

Growth is the only way that people who wear suits that do absolutely nothing to manufacture the product can keep making their billions.

If they can add an ounce of cellulose to each burger rather than have 100% beef, it adds up to billions in their pockets and they don't have to lift a finger for it.

If they can save $.25 per employee in wages it can add up to billions in their pockets and they don't have to lift a finger for it.

These lazy big corporate business owners are even to lazy to get out and look their employees in the eyes a couple times a year. Perhaps that would be a good place to start.

Apr 5, 2014 1:29PM
Bring back the hot mustard sauce and I may eat there again!
Apr 6, 2014 12:54AM

Do you remember the good old days? When the burgers were fresh out of the warming drawer and not hot from the griddle. The pre-precut onions were taken from the bag and not steaming with a little salt and butter fresh off the grill. Buns weren't fresh and smelled like bread and not taken from a plastic bag from the freezer with pre printed color on the bun to indicate it's just been given a little butter and grilled to a crispy crust with a soft steaming bun. Having the cheese actually melted from the heat of the burger and not still cold. But, after making billions of them we just care about speed and not even considering using quality products with tried and true techniques like the good old days. We have become confused over time.

Good luck MCDs it's been good while it it's time to start over. Take the burgers out of the warming drawers and put them back on the grill. Apologize to your paying public. Stop over processing the food and simply make fresh burgers with real meat and not pink slimed induced vomit that sends you to the can hiccupping uncontrollably while running for your second roll of toilet paper!

Apr 5, 2014 1:14PM
Why does MSN run some shabby article every day about McDonalds?
Apr 5, 2014 9:02AM
No sense spending on good greens greens to de-tox your body. One slaughter house burger (complete with brain tissue) and a large fry will send you quickly for an explosive sit down !
Apr 5, 2014 7:34AM
watch your prices. Perhaps add Fried Chicken to the menu and make sure the food is fresh. this has started to be a real problem.
Apr 4, 2014 5:08PM
since half of Mexico spends time legally or illegally in the U.S. why not try some mini chimis.
Apr 5, 2014 1:36PM
The last time I ate a McD's was about 10 years ago for some special or other.  That will be the last time I eat at McD's.  Impolite servers, totally boring food with no taste and the texture of cardboard and that includes the fries.  No character to the surroundings and the whole experience was somewhat similar to going through a car wash.
Apr 5, 2014 6:25PM
About 3 years ago I got a craving for a Big Mac.  When I asked for a packet of barbecue sauce for my fries I was told they are now 22 cents apiece.  Haven't been back.  Talk about greed.  I'll go to Jack-in-the-Box.  Good service, food made after it's ordered and if something was done wrong, they correct it without a hassle. 
Apr 5, 2014 1:23PM
If you like cold burgers, stale buns and worm like fries, then McDonalds is the place for you. How can a hamburger place screw up a hamburger so bad?  And they don't care. Going on their name for too long. They are losers in my book. Pay a decent wage and get some decent help. Otherwise, people like me will go by by for good.
Apr 4, 2014 5:23PM
In the Crimea, you know have to order a Big Vlad instead of a Big Mac.
Apr 6, 2014 8:02PM
I worked for McDonalds in the early 70's before heart healthy became the craze. The burgers had more fat in the beef. The fries and fish were cooked in beef tallow.  The fish fillets buns were steamed and the cheese had the best flavor. All in all the sandwiches tasted wonderful. Now they cook in cholesterol free oil the beef is so lean it is tasteless. Somehow McDonalds has factored out flavor in the equation of good food. There was a time when the Big Mac was to die for. Now it is sad to say that Burger King makes a better Big Mac than McDonalds does.
Apr 6, 2014 10:10PM
I live in the Dallas-Fort Worth TX better be, or speak Mexican around here because NOBODY behind the counters speaks "Gringo"! Damn shame!
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