Why McDonald's Corporation's Investors Shouldn't Be Lovin The Latest Report

By Markets Fool.com

McDonald's Corporation delivered yet another dismal earnings report on Wednesday, but the stock made a surprising move after the news came out. Shares jumped 4% out of the gate and closed up 3% for the session as investors overlooked the decline in same-store sales and instead focused on management's promise to present its turnaround plan on May 4.

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New CEO Steve Easterbrook said the plan would "improve our performance and deliver enduring profitable growth." Easterbrook also hinted at changes to come, saying, "We are committed to making McDonald's a modern, progressive burger company delivering a contemporary customer experience."

For a company in the midst of perhaps its biggest identity crisis ever, investors seem to be putting a lot of faith in Easterbrook's words. During the quarter, same-store sales fell 2.3% globally, with declines of 2.6% in the U.S. and 8.3% in Asia.

In the Asia region, operating income declined by a whopping 80% due to food safety concerns and other problems surrounding the business in China and Japan. McDonald's also projected a decline in comparable sales for April, and said it would close about 700 underperforming stores this year.

Against that backdrop, Easterbrook is tasked with restoring growth to the world's largest restaurant company. The new CEO brings an impressive pedigree to the executive chair, having previously turned around McDonald's U.K. and served as Chief Brand Officer for the company. He's also taken some savvy steps to boost the brand in his short period at the helm, including banning the use of human antibiotics in chicken, lifting the minimum wages for employees at company-owned stores, and testing all-day breakfast and premium sirloin burgers.

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However, there are still several headwinds that may be beyond his control whatever the turnaround plan is. Let's take a look at a few of them:

Frustrated franchisees
Perhaps the most immediate obstacle to any brand overhaul is McDonald's franchisee partners, who have grown frustrated with declining sales, a bloated menu, and seemingly endless requirements to purchase new equipment.

Following a recent Turnaround Summit conference in Las Vegas, many franchisees were flabbergasted at the company's lack of direction. In a survey by Janney Capital Markets, some called the McDonald's system "broken," while others said the future "looks very bleak."

What seemed to irk the operators most was the company's plan to roll out the Create Your Taste customizable burger platform at 2,000 domestic locations this year. The operators pointed out that McDonald's has staked its brand on speed and automation, the opposite of what the Create Your Taste menu promises. Many have also balked at the expenditures required by the new menu.

Otherfranchisees felt betrayed by the company's decision to raise wages without consulting them first. Though the move doesn't require franchisees to raise pay for their workers, it does put pressure on them and raises employee expectations.

Competition is leaving it behind
Though McDonald's is having a particularly bad year, legacy fast food companies like Burger King andWendy's have also struggled since the recession as consumer tastes have changed.

Instead of reaching for a burger and fries from one of those major chains, Americans are turning to fast casual purveyors such as Starbucks,Panera Bread, andChipotle Mexican Grill, which have boomed over the last ten years. Each of those chains is decidedly un-McDonald's-like, both in product and philosophy. Yet burgers remain popular, as the success of higher-quality chains like Five Guys indicates.

McDonald's is keenly aware of this shift, but it presents a dilemma. The company has tried to adapt, adding items such as snack wraps and its McCafe line, and it is poised to do the same with its new sirloin burgers at a price of $5. However, these menu expansions have slowed down service speed.

The bigger problem is that by going upscale with gourmet or customizable burgers, McDonald's is leaving behind its core customer, who is looking for a meal for $5 or less. The Golden Arches' biggest advantage over Chipotle and other fast casual chains may be its lower price point, but it gives that away by trying to be an imitator. Co-opting the model of Chipotle or Five Guys essentially makes McDonald's a me-too brand and surrenders the competitive advantage it has built up in its 60 years in business.

The key question Easterbrook and Co. must answer when they deliver their turnaround plan is how they will reinvigorate the brand without simply copying competitors. McDonald's needs to meet the demands of consumers in a way that reinforces the brand and maintains its appeal to its core customer.

Easterbrook's repeated insistence that the chain become a modern, progressive burger company offering a contemporary customer experience is a sign that big changes are ahead. If he can make the necessary changes while maintaining the brand's integrity, the plan could deliver the results investors are hoping for.

The article Why McDonald's Corporation's Investors Shouldn't Be Lovin The Latest Report originally appeared on Fool.com.

Jeremy Bowman owns shares of Apple and Chipotle Mexican Grill. The Motley Fool recommends Apple, Chipotle Mexican Grill, McDonald's, Panera Bread, and Starbucks. The Motley Fool owns shares of Apple, Chipotle Mexican Grill, Panera Bread, and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.