The Most Hated Company in the Food Industry

Source: Flickr user Annette Bernhardt.

The most hated companies in America have a knack for angering people. Whether it's due to inept management, subpar products, poor service, or lackluster stock performance, these companies earn the wrath of customers, employees, and shareholders alike.

The food industry in particular has its share of struggling businesses. It's a brutal arena, where cutthroat competition can take a toll on even the strongest businesses. Competitive advantage is often fleeting in this sector, as changing consumer preferences can cause yesterday's winners to quickly become today's losers. In addition, the low wages typical in the industry often lead to tension with employees.

In fact, one of the titans in the food industry -- McDonald's -- has fallen from grace in recent years. The fast-food icon is one of the greatest restaurant success stories in history, yet it was recently named one of the most hated companies in America by 24/7 Wall St.

The trend toward healthier eating has taken a toll on McDonald's business. Many consumers are abandoning the Big Mac maker in favor of competitors that offer what they believe to be healthier and higher-quality food. Fast-casual chains such asChipotle Mexican Grillhave steadily taken share from McDonald's and other fast-food restaurants. This trend is unlikely to change in the foreseeable future.

Worker compensation is also a hot-button issue. Thousands of fast-food workers recently went on strike to protest low wages and demand pay increases. McDonald's subsequently announced that it would raise the entry-level wage for employees at its company-owned restaurants 8% to an average of $9.90 per hour. But as my colleague Rich Duprey explained, those wage increases do not apply to the hundreds of thousands of employees who work at McDonald's franchised locations.

McDonald's is in a difficult position; low wages dampen employee morale, but pay hikes increase labor costs and ding profit margins. And if McDonald's tries to pass on those costs to customers, sales could weaken further.

That's because unlike Chipotle and other competitors that have displayed strong pricing power, McDonald's has found it difficult to increase menu prices without witnessing a corresponding drop in demand. McDonald's customers tend to be more cost-sensitive, and the company's low prices are what many consumers find to be most appealing about its offerings. If that value proposition comes under pressure, McDonald's sales could suffer.

Combined, these issues have resulted in a stagnating stock price that has significantly underperformed the S&P 500; over the last two years, McDonald's stock fell 5% even as the broad-based index rose more than 30%. That has earned it the wrath of shareholders, and activist investors have begun to demand change.

It's uncertain whether these activists can compel management to make the type of lasting change that can drive sustained value creation at McDonald's. That's because many of the challenges facing the company today are structural in nature. Consumer preferences are changing, and they're moving away from McDonald's.

Management has announced a slate of initiatives intended to help right the ship. Of these, I find the test program to offer breakfast all day to be interesting. McDonald's is the industry leader with about a 30% share of the breakfast market, and customers have been clamoring for extended breakfast hours for years. If McDonald's can overcome the operational challenges related to offering breakfast items along with lunch and dinner food, the program could help drive traffic to its restaurants and stem the tide of disappointing same-store sales.

Most important to McDonald's long-term future, however, will be a greater focus on healthier food offerings. New initiatives such as offering antibiotic-free chicken and growth hormone-free milk will help. But can McDonald's serve healthier ingredients while still keeping a lid on menu prices? And can the burger maker convince consumers that its new food is in fact healthy? Investors will need to ponder these questions. What do you think? Let us know in the comments section below.

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Joe Tenebruso isportfolio manager ofTier 1 Investments, a Motley FoolReal-Money Portfolio.You can connect with him on Twitter@Tier1Investor. Joehas no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and McDonald's. The Motley Fool owns shares of Chipotle Mexican Grill. 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.

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