What Will McDonald’s Do About Innovation?

Last month, McDonald’s (NYSE:MCD) posted its first same-store sales decline in nine years. Company executives, who blamed the 2.2 percent drop on marketing missteps, the weak economy, and increasing competition from rivals like Burger King (NYSE:BKC) and Yum Brands’ (NYSE:YUM) Taco Bell, subsequently rearranged its management structure.

On November 15, the company announced that that current U.S. President Jan Fields would be replaced by the company’s Global Chief Restaurant Officer Jeff Stratton. Now analysts are betting that Stratton’s soon-to-be-unveiled marketing plan could restore Wall Street’s confidence in the burger chain.

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What is the Problem with McDonald’s?

Since McDonald’s sales peaked in February, when the company reporting that same-store sales had grown by 11.1 percent, monthly sales have been declining. Morningstar analyst R.J. Hottovy told the online publication Ad Age that “it’s possible that McDonald’s ran into sales problems because its innovation pipeline has been relatively small compared with previous years’.” Several years ago the chain expanded its menu with the addition of its McCafe line of coffee and espresso-based drinks.

“They have aging stores and a much-intensifying competitive set in terms of innovation, store design and…marketing,” an advertising executive told Ad Age. “Something is going to have to happen — either changes to the marketing management, to the current agency roster or investing in their stores or all of it. The status quo is not going to work.”

McDonald Happy MealOn December 1, Stratton will assume the position of McDonald’s U.S. President, where he is expected to implement an a new marketing plan increase the company’s sales. While his proposal has yet to be unveiled, McDonald’s Chief Executive Officer Don Thompson told investors in early November that the company must be able to face the weak economy as the “new normal.” He believes the company must put a greater marketing emphasis on value platforms like the Dollar Menu and increase innovation for premium limited-time offers to offset the rising competition and poor economic conditions.

CHEAT SHEET Analysis: Can a New-Product Pipeline Help?

One of the core components of our CHEAT SHEET Investing Framework requires that companies consistently produce successful products or services. McDonald’s built its reputation on serving low-cost, quickly-made burgers, which made the company the most iconic fast food chain in the world and helped it weather the 2008 financial crisis. However, the chain’s competitors, including Wendy’s (NYSE:WEN), Burger King, and Taco Bell, have now met and outmatched McDonald’s in terms of innovation by pushing new menu items heavily in their marketing. This strategy has helped all three chains out of sales slumps, while analysts and company executives have both highlighted innovation as problem for McDonald’s this year.

Restaurant remodeling and marketing changes have already begun at the chain. Last week, the company began testing three new varieties of Quarter Pounder, the Habanero Ranch, the Deluxe, and the Bacon and Cheese, in its Northern California restaurants. However, the true extent of the company’s innovation plans are dependent on Stratton’s plan.

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