Since becoming McDonald’s (MCD) CEO in 2015, Steve Easterbrook has won kudos from Wall Street for tactical tweaks such as serving breakfast all day and selling corporate-owned restaurants to franchisees. Next on the menu: improving the company’s food.
The Home of the Golden Arches said Thursday that, starting next year, most McDonald’s restaurants will use fresh beef in their signature Quarter Pounder, rather than the frozen patties operators have used since the burger was introduced in 1971. Under Easterbrook’s leadership, McDonald’s has also promised to use only cage-free eggs by 2025 and plans to quit using artificial preservatives in Chicken McNuggets.
Transforming the Quarter Pounder, however, may be easier say than done, according to franchise consultant Richard Adams, who described the chain’s plan as something that “may well be unrealistic.”
“Everyone should keep in mind that McDonald’s is being run by people with little or no real restaurant experience,” he said in an email to CBS MoneyWatch. “They’re a bunch of accountants and marketing people who’ve never run a restaurant or cooked a Quarter Pounder. Accountants and marketing people are good at coming up with plans that look good on paper but may not work in real life.”
Becca Hary, a spokeswoman for McDonald’s, declined to disclose the projected costs to restaurant owners of using fresh beef. “We will work closely with our franchisees on all aspects of this transition,” she said in an email. “ As in most cases, our size and scale are a benefit.”
Franchisees have complained for years that their profits have shrunk and costs have risen, straining their relationship with McDonald’s leadership. Investment consulting firm Segal Macro Advisors has called for a shareholder vote on a proposal to give independent restaurant owners a new kind of preferred stock that lets them elect a board member. McDonald’s opposes the plan, and has asked the Securities and Exchange Commission for permission to leave Segal’s proposal off its proxy, according to Bloomberg News.
McDonald’s has lost ground in recent years — especially among millennials and consumers wanting fresher, healthier food — to rivals such as Wendy’s (WEN), which has long touted its “fresh, never frozen” food, and burger chains such as Five Guys Burgers and Fries and Smashburger.
In comments during the company’s recent annual meeting with Wall Street analysts, McDonald’s Chief Strategy Officer Lucy Brady acknowledged that worries about food quality has cost the company business. “Some of our best customers just aren’t visiting us as much as they used to, and we know why,” she said. “As customer expectations increased and evolved, our historical advantages of quality, convenience and value didn’t keep pace.”
During its most recent quarter, same-store sales (which measures activity at existing locations) in the U.S. slumped 1.3 percent as the hoopla over McDonald’s all-day breakfast faded in its largest market. The company did better aboard, with a 2.7 percent gain in store sales.
Burger King, which is part of Restaurant Brands (QSR), and Wendy’s both reported gains in comparable sales during that same time.
Promotions such as the new Big Mac variants introduced in January, along with sales promotions for coffee and the McPick 2, helped boost same-store sales in the latest quarter, according to Credit Suisse analyst Jason West. He raised his forecast for same-store sales for the period from a decline of 2 percent to a gain of 0.5 percent. He also increased his price target on McDonald’s stock to $137, from $127.98, rating it as “Outperform.”
McDonald’s shares have climbed more than 6 percent this year, outperforming Wendy’s and Jack in the Box (JACK), which have gained 1 percent and fallen more than 9 percent, respectively. Canada-based QSR, which announced earlier this year that it would buy Popeye’s Louisiana Kitchen for $1.8 billion, has posted a gain of more than 17 percent.
Only time will tell whether McDonald’s food will be as tasty as its financial returns.