Image source: McDonald's.
Continue Reading Below
After five straight quarters of positive comparable sales growth in the US,McDonald's(NYSE: MCD) fell once again in the fourth quarter, declining 1.3%.
Management blamed the strong response to the launch of all-day breakfast for the slide in domestic comparable sales. Outside the US, performance was strong as global comps were up 2.7%.
Still, the slowdown in US sales underscores the challenge that CEO Steve Easterbrook faces now that all-day breakfast is no longer a reliable sales driver. Going into his third year leading the fast-food giant, he may have already picked much of the low-hanging fruit to boost US sales, making future sales gains more difficult.
One factoid may show more than any other why McDonald's is likely to face continued headwinds at home. According to the company's own internal research, only one in five millennials has tried the Big Mac, the company's signature sandwich.McDonald's has more than 14,000 restaurants nationwide and does about $35 billion in annual systemwide sales. It is by far the #1 restaurant chain in the country by sales, and for years has touted "billions and billions" served on its trademark golden arches. The Big Mac even had its own jingle in a popular ad campaign in the 1990s. That 80% of the country's young adult generation that has never tried its most famous sandwich is stunning, and bodes poorly for the its future as American food tastes continue to change.
Interestingly, McDonald's isn't the only Big Food purveyor that's noticed such a trend.AB InBev's(NYSE: BUD) Budweiser found that 44% of drinkers aged 21 to 27 had never tried its classic brew, which despite several years of declining sales is still the third-most popular beer in the US, after Bud Light and Coors Light.Since the discovery, Budweiser has tried a number of different ad campaigns to target younger consumers, with mixed results.
McDonald's has a plan
To combat the widespread diffidence to its trademark sandwich, McDonald's is introducing variations of the Big Mac for a limited time -- the Grand Mac and the Mac Jr. The Grand Mac will be a one-third pound burger with an extra slice of cheese, dressed like the Big Mac, while the Mac Jr., at just 420 calories, will have just one patty and no middle bun. McDonald's is also giving away 10,000 bottles of its special sauce to further promote the burger.
Offering varieties of the popular sandwich seems like a clever move. It will give McDonald's something to boast about in ad campaigns, and it may even entice millennials to sample one for the first time. But it does little to mitigate the underlying trends that are dissuading young people from visiting McDonald's in the first place.
Sales of organic foods increased 11% in 2015, well outpacing the overall growth rate of 3% in the food industry. McDonald's has taken some steps to accommodate these changing food tastes, pledging to eliminate chicken treated with human antibiotics from its supply chain and eventually use only eggs from cage-free chickens. The company has also been experimenting with burgers made from fresh, rather than frozen, meat, but the McDonald's brand is built on automation and convenience. It's designed to serve cheap, tasty food quickly, and as customers crave more authentic, traditionally made food, the Golden Arches is at a disadvantage.
Budweiser's parent has the luxury of diversifying into craft beer brands, as that company has bought several breweries to get a piece of the fastest-growing segment of the beer market, which is being driven by millennials. But such a strategy would not have the same benefits for McDonald's as it does not have a distribution network to leverage in the way that Budweiser does.
Ironically, McDonald's was the one-time majority owner ofChipotle Mexican Grill(NYSE: CMG), which was a millennial darling before 2015's E. coli outbreak. McDonald's spun off the burrito chain in 2006 as Chipotle Founder Steve Ells had become increasingly frustrated with McDonald's way of doing business, which was at odds with Chipotle's "Food with Integrity" platform.
The lesson for McDonald's shareholders may be that the spike in sales following the all-day breakfast launch is going to be a tough act to follow. With international performance still strong and a refranchising program that seems to be boosting profits, the stock looks safe for now. But at some point down the road, Mickey D's will have to solve its millennial problem if it wants to remain the nation's dominant fast food chain.
10 stocks we like better than McDonald's When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and McDonald's wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of January 4, 2017