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McDonald's Corp.'s disappointing second-quarter numbers and outlook for the rest of the year sheds light on the burger flipper's biggest problem: Its sources for growth are hitting a wall.
In the past two years, the company's restaurant count in its traditional U.S. base has risen less than 1 per cent. Over the same period, it has grown its restaurant total in Europe by nearly 6 per cent, and in the rest of the world by more than 10 per cent. Nearly 60 per cent of its locations, and nearly 70 per cent of its systemwide revenues, are now outside of the United States; increasingly, McDonald's' success depends on foreign markets, and its ability to grow there.
That makes it dependent not on the firming U.S. economic recovery, where its room for expansion is severely limited, but rather on the shakier economic ground upon which its customers in other markets are treading. It is heavily exposed to Europe's deep and continued funk (Europe accounted for nearly 40 per cent of revenues last year). It is looking to grow throughout emerging markets where the economic pace has come under increasing pressure. And in many of its potential global growth markets, unlike in its U.S. home, a McDonald's hamburger is still essentially a luxury purchase for the vast majority of the population.
In the United States, meanwhile, where the company's fast food is considered a cheap alternative, the accelerating economy may actually work against it, as consumers are increasingly willing to cast their eyes on higher-priced and what many see as healthier alternatives to traditional fast food. There, McDonald's is walking a delicate tightrope, struggling to identify new menu options and restaurant designs that can tap into the public's desires while trying to avoid alienating its traditional customer base. Sometimes, it hits on something that catches on with customers and drives sales and market share (think premium-quality coffee); other times, it unveils duds that confuse and disappoint customers (think the premium-priced Angus Burger, which McDonald's dropped from its U.S. menu earlier this year).
The fast-food industry, especially in the competitive and saturated developed-economy markets, is increasingly becoming like the high-tech industry: You're only as good as your latest product innovation. And for the moment, Wendy's and Burger King seem to be capturing more fast-food lovers' salivary glands than the Golden Arches.
That has started to translate to the stock market, too, where McDonald's strong run over the past six months has ground to a halt. As investors take their profits, they have been turning increasingly to Wendy's Co., which has been winning the new-product battle lately and derives nearly 90 per cent of its sales from the U.S. market, offering much less risk exposure to struggling overseas economies.
McDonald's shareholders have little to gripe about; the stock has still nearly doubled in the past four years. But the latest numbers imply that the market may have priced in smoother sailing – and more growth potential – than the company can reasonably expect from here.
David Parkinson is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow him on Twitter at @parkinsonglobe .
David Parkinson