Tuesday, March 12, 2013

What's McDonald's Specialty? Not Food.

McDonald's has a pretty bad image. Well at least we think it does. This 2005 survey found it had a 69% favorable rating. A lot has changed in 2005, and the image has suffered some serious prole staining. Definitely a prole place to eat. My inner prole can't resist; I think their breakfast sandwiches are excellent (the McGriddle), but I limit myself to one per season. There is a stigma to eating McDonald's food, yet they still make billions off the hunger of the proles. The food sucks though, and the brand has taken some publicity hits. Their earnings have slowed due to the above factors and competition. What is it that they do best? McDonald's built a brand for cheap, quick food that would have a broad appeal to many consumers that would make you, franchise owner, a buck.

McDonald's isn't about the food anymore, and it hasn't been for a while. McDonald's was bought and expanded by Mr. Ray Kroc from the McDonald brothers. He loved it for the fries. As he saw it, the fries would be what he'd sell for a wider profit margin compared to the burgers. McDonald's made their way through the American landscape, becoming the first fast food place in many towns. Why? Because they were can't miss franchise opportunities. McDonald's wrote franchise contracts so tight that when you walked in, you knew where you were and what you were getting no matter if in Peoria or Bakersfield. The name lured in potential franchise owners to invest their money (franchise fees now $1.5 minimum) for that guaranteed cash machine that shits $100s. The food was standardized to be replicated all over America, and in a gross manner, the size of their meat and potato input orders eventually made the cows and potatoes homogenized as well. It was a great system. It is a bloated system as 85% of all stores are franchise operated, and McDonald's only gets 4% of food sales and then the lease fees. In reality, they are skimming EBT food stamps and acting like a landlord.

Tough thing for McDonald's is that competition came in from Burger King, Taco Bell, and Wendy's. Then there was the Subway sandwich explosion. McDonald's lost that common man quick meal customer. They hunted lower on the socioeconomic scale, as it's always easy to rope in the lowest common denominator and rapidly rising food stamp user pool. Even though I avoid other fast food, the other brands don't reek of lumpen prole as much as MickeyD's. This has really hurt them, and they are trying to spruce up their image. The franchise operators are upset. Input costs are rising (thanks Bernanke), but McDonald's has the low socioeconomic consumers who can't afford more. They can't use worse inputs because they were already busted for using pink slime. They can't pass on input costs. They just beat expectations by not declining as much as forecast 1.5% vs. 1.6%. Whoopteedoo. These guys are heading for a fall.

This is not an investment advice post, but it's just observations on a company stepping away from their specialty. McDonald's had been great at making quick, cheap food for customers up and down the socioeconomic chain. Now they are contract writing specialists who operate a skim off of food stamps and manage commercial property. Many of the locations they built older McDonald's on are now in bad neighborhoods, and they have put other McDonald's into the neighborhoods of successful MickeyD's, cannibalizing their same store sales. Why? To get those franchise fees. What have they done for years now to puff up their stock price and inflate earnings per share? Over 50% of net income goes to their dividend, and they keep buying back stock. Financial machinations, contract writing, and leasing; nothing to do with food. These guys suck and have peddled garbage for years to the world, including their brand of financial innovation. No one forces anyone to eat it, and no one forced your local wealthy individual who was enticed by the dollar bills McDonald's waved in front of his face. We brought this on ourselves. They will not completely disappear, but we can hope many close. I will be happy to see these son of a bitches get whacked after we hit Peak FED + Peak Fatty.

*Below is the nicest McDonald's you'll ever see. It is in Freeport, Maine.

1 comment:

asdf said...

Wendy's is a fast food chain that I've been impressed in their shift to quality (for fast food).

Chick-Fil-A remains the high end for fast food franchises.