McDonald's, a Matter of Balance

The Wall Street Journal highlights McDonald's (NYSE:MCD) menu evolution. It touches on why retail is so exciting: it is so dynamic and you never know what might happen. 

A few themes of note:

Same store sales trends and number of menu items; the Technomic chart shows MCD, Burger King and Wendy's number of distinct lunch/dinner menu items which roughly shows rising MCD items and flat to lower items at Wendy's and Burger King, and seems to correlate to MCD's recent same store sales increases. We are convinced that MCD's sales gains have came from their new total dayparts coverage--no matter what time of day, McDonalds has it covered. But the chart must be updated for breakfast (Wendy's is still testing theirs and Burger King finally rolled out an breakfast rehab this fall) as breakfast is 20-25% of the should be QSR sales base now.

Some stores and franchisees underperforming: without a doubt.  Franchisees have higher cost of capital than the corporate entities and pay royalties that company stores do not. And 24 hour operations don't make sense everywhere. To its credit, MCD did partially subsidize McCafe and other capital expenditures, unlike the other QSR Majors.  

Interestingly though, at its 2010 Investor day, MCD reported franchisee average cash flow at all time record levels. But free cash flow, which subtracts capital expenditures, is a superior metric. We suspect that is not as positive.

Operational Complexity and Customer Confusion: these are real issues of concern and they must be balanced by a real culture of staff learning and development and a balanced marketing execution. MCD did have problems before. But they have the luxury of the world's largest restaurtant ad fund expenditure base ($1 billion plus) and being able to talk to new products, price, value, the barbell and lifestyle through both national and local co-op fund execution.    

New products, new news  is essential for the international (and national) QSR players. The store penetration level demands it . However, It works for IN N Out to still to have just 4 major items on the menu, or for Chipotle to not have added a new menu item in 17 years, they both have lots of runway left for development.