Wake up and smell the coffee, McDonald's
Sales slide at the burger joint as competitors lure consumers with cheap options -- and home beckons.
McDonald's (MCD) saw strong sales in the depths of the 2009 recession as value-conscious consumers gave up on sit-down dining options for the Dollar Menu at the Golden Arches.
However, as we learned this week, MCD has seen that trend come to a halt. Same-store sales for the iconic burger joint fellfor the second consecutive month in November.
Most of the experts out there are attributing the decline to competitors like Burger King (BKC), Yum! (YUM) restaurants like Taco Bell and KFC, and stores that are part of the Wendy's/Arby's Group (WEN). These other fast-food chains focused on low-priced options recently to steal some of MCD's thunder.
But it's more than that. Consumers aren't just buying a cheap burger at a competing fast-food chain -- they're actually cutting back even more by making more food at home. That makes me wary of any restaurant stock right now. If you want proof of this trend, just look at the decline of Mickey D's "McCafe" coffee sales recently.
McCafe offerings were important to fueling sales growth in the summer of 2009. McDonald's spent $100 million to promote its McCafe lattes and gourmet coffees, aimed at taking away business from Starbucks (SBUX).
The idea was to give caffeine junkies a quality drink for less. It was successful -- specialty coffee sales for the fast-food chain climbed to double-digits as a result.
But this trend has hit a wall as consumer confidence has remained relatively weak and unemployment has pushed up past 10%. After already cutting $5 Starbucks bills to a $2 latte at McDonald's, many Americans are still trying to save more money. That means cutting expenses even more.
The net result is that consumers are passing over both Starbucks and relatively cheaper McCafe drinks to brew java at home. If you doubt this movement, just take a look at the performance of coffee stocks recently like Diedrich Coffee (DDRX). This stock was trading for a mere 50 cents at the March lows and is now seeing shares push $35.
Part of that surge was due to the bidding war between Peet's Coffee and Tea (PEET) and Green Mountain Coffee (GMCR). But don't forget the big reason that both these companies wanted DDRX was because of tremendous sales and earnings performance.
In the third quarter, Diedrich's revenue increased 52% over the previous year to $15.8 million thanks to a 66% surge in sales of the innovative Keurig K-Cup coffee packets. These brisk sales prove that consumers are not just looking for a cheaper alternative to Starbucks -- they're looking for a cheaper alternative to McDonald's too!
Yes, competition has sapped some of McDonald's momentum, but it's a mistake to think that all MCD has to do is win those customers back. Cash-strapped consumers are bringing their lunches to work more and brewing coffee at home to save money. That makes me wary of the entire restaurant industry right now.
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Investors expect the report to show some weakness, and are cautious ahead of the long holiday weekend.
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