Has McDonalds found its golden ticket

Posted on: 2016-10-26 2:01 PM

McDonald’s faces a significant challenge in how to adapt its business and products to changing consumer tastes.
 
It has the potential to offer fresher, better quality food thanks to operating innovations which could keep costs down.
 
McDonald’s also has the potential to grow via a new store concept which focuses on coffee and premium foods rather than its traditional products.
 
A key problem faced by McDonald's (NYSE: MCD) is changing consumer tastes. Consumers are becoming much more discerning with their food choices and in recent years more premium burger chains such as Five Guys and Shake Shack have offered better quality burgers than McDonald's. This has put the demand for McDonald's burgers under pressure, reducing the proportion of the company's sales derived from burgers to just 20%.
 
However, I believe that McDonald's has the potential to reconnect with customers through the introduction of better quality food, increased innovation, growth outside of its traditional burger category and new product launches. All of these factors could prove to be positive catalysts on the company's share price.
 
Food quality
 
Since the 1970s, McDonald's business model has relied on using frozen patties for its burgers. This worked well for a number of years because it kept costs low. However, demand for better quality and fresher food has increased in recent years and is forecast to continue to do so in future. This creates a challenge for McDonald's since utilizing freshly made patties would increase costs and could push many of its products outside of its customers' price range.
 
In our view, McDonald's will be able to adapt to changing customer tastes through a series of operational improvements. For example, McDonald's has trialed the use of self-service kiosks outside of the US, as well as dual-point service. Both of these changes mean that McDonald's requires fewer employees, which keeps costs down. It also speeds up the ordering process and allows McDonald's to serve more customers in the same space of time.