MCD: A PENDING MIGHTY DISASTER

We’re bearish on MCD, so one could argue we have a bearish bias, but we remain present and well-grounded in reality.  Make no mistake, MCD has a top line issue and not a cyclical one.  That said, we don’t believe management is willing to acknowledge the secular issues the company faces and new products like Mighty Wings seem like a desperate attempt to hide from reality.

We think MCD’s decision to sell its Mighty Wings this fall could potentially be disastrous for the company.  We have three main issues with the current MCD menu strategy:

  1. Mighty Wings will not enhance the McDonald’s brand (Premium Wraps have not helped either)!
  2. Both new products (Mighty Wings and Premium Wraps) have slow service times.
  3. Adding new products to an already complex menu is the wrong direction for the company to go.

Selling chicken wings may temporarily boost sales during the LTO, but it could end up doing more harm than good.  Asking the currently disgruntled franchisee community to prepare yet another new product, with a slower than normal preparation time, will only add to the service issues the company is already experiencing.  In our view, this is likely to lead to the further deterioration of the MCD brand.

McDonald’s franchisees that sold wings in the test markets have suggested that the above average cooking time for the new menu item was an impediment to their service times.  If this is indeed true, we expect drive through times to slow significantly.  What it ultimately comes down to is the margin on Mighty Wings relative to other products on the menu.  If wings generate a lower margin than a core sandwich and slow service time, then MCD could be headed for a 4Q13 disaster.

This is all too reminiscent of the period from 1, when we witnessed the sad decline of a mismanaged McDonald’s brand.  During that time, the company was focused on unit growth and cost reduction rather than driving high margin, top line sales.  As the image of the brand began deteriorating, management failed to invest in the brand and customer experience.  Rather, they turned to monthly promotional tactics to in order to drive short-term sales at the expense of brand equity and margins.  This strategy did not end well for either the company or investors and we’d be surprised if this time was any different.

MCD: A PENDING MIGHTY DISASTER - MCD Sentiment Screen

 

 

 

Howard Penney

Managing Director