At McDonald’s, Salads Just Don’t Sell; McDonald’s has made a push to offer healthier options such as oatmeal, salads and smoothies, but sales growth has slowed despite a more diverse menu

At McDonald’s, Salads Just Don’t Sell

JULIE JARGON

Updated Oct. 18, 2013 8:33 p.m. ET

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McDonald’s has rolled out coffee drinks, while Wendy’s and Taco Bell have succeeded selling less nutritious burgers and tacos. Bloomberg News

Is touting healthier menu items good for business? McDonald’s Corp. MCD -0.28% , trying to shed its “Super Size Me” image of a decade ago, has long since abandoned supersize portions, rolled out oatmeal and smoothies, and added apples to all its Happy Meals. Last month it said it would begin offering customers a choice of side salad, fruit or vegetable in place of fries in its value meals.

But the fast-food company hasn’t had a new product become a bona fide blockbuster—a unique new product that stays on the menu and meaningfully affects business—since the 2003 introduction of the pancake sandwiches it calls McGriddles, according to analysts.

Many of its more healthful offerings don’t sell well, they say. McDonald’s Chief ExecutiveDon Thompson recently told investors that salads make up only 2% to 3% of U.S. sales.

Meanwhile, rivals Wendy’s Co.WEN +1.43% and Taco Bell have recently scored hits with the Pretzel Bacon Cheeseburger and Doritos Locos Tacos. Taco Bell has sold more than half a billion Doritos Locos Tacos—which have about 50 more milligrams of sodium than its regular tacos—since March 2012, making it one of the company’s best-selling products ever. Analysts and franchisees says Wendy’s pretzel burger—boasting 130 more calories than a Big Mac—has been a hot seller since it made its debut in July, and some predict Wendy’s could make the limited-time offer a permanent menu item.

McDonald’s remains the king of the restaurant business, but its growth has lacked luster and its stock has underperformed in the past year. Some analysts say it has lost its identity in an attempt to fix its image—a notion that points to the challenges for the industry at a time of growing pressure in the U.S. to respond to obesity and other health woes while continuing to boost profits.

McDonald’s is “focused on trying to be all things to all people, whether it’s catering to health-minded people with oatmeal or to Millennials with snack wraps. They’ve gone so far afield from their core menu that they’re not really resonating with anyone,” says Howard Penney, managing director at Hedgeye Risk Management, an independent investment research firm.

“McDonald’s is never going to be perceived as healthy, so for them to spend too much time on healthy items doesn’t make a lot of sense to me,” Mr. Penney said.

“It’s all about choice. We strive to provide our 69 million customers every day with a variety of delicious, high-quality food and drink options at the value and convenience they expect from McDonald’s,” a company spokeswoman said.

McDonald’s efforts to trumpet more nutritious items haven’t placated many public health advocates. After McDonald’s announced plans to offer vegetables with value meals last month, the Center for Science in the Public Interest said, “Ronald McDonald’s slow march toward healthier meals made a major advance today, but a long road lies ahead for the company.”

McGriddles were considered a feat of food science when they came out: eggs, bacon and cheese sandwiched between two pancakes infused with maple-flavored crystals and embossed with the McDonald’s logo. A few months after McGriddles’ introduction, McDonald’s posted an 11% rise in revenue and a 12.5% gain in profit and credited the product with helping draw in a million new customers a day.

But much has changed in the past 10 years. The world’s largest fast food chain by sales, McDonald’s is the biggest target of health-related criticism, especially since “Super Size Me,” the 2004 documentary.

Some franchisees say that has resulted in a play-it-safe approach to new food items that is hindering growth. McDonald’s rollout of McCafé coffee drinks has been successful, but healthier menu items haven’t always fared well. McDonald’s earlier this year dropped its Fruit & Walnut Salads from the menu because, according to one franchisee, “We were throwing away more than we were selling.” The company said at the time that it constantly evolves its menu to meet customers’ “changing needs.”

Even self-described health nuts don’t go to McDonald’s for the nutritious stuff. When Isaiah Stratton, a former Marine who jogs regularly and swears off soft drinks, goes to McDonald’s, he orders a double cheeseburger and fries. “If I specifically wanted a salad I’d go to Panera,” said Mr. Stratton, a 31-year-old actor in Nashville, Tenn.

Last October McDonald’s posted its first drop in monthly same-store sales in nine years. McDonald’s in July reported second-quarter profit and sales growth that fell short of Wall Street expectations.

The chain is scheduled to report third-quarter earnings on Oct. 21. McDonald’s shares have risen 11% since it reported that first drop in monthly sales; Wendy’s shares have risen 90% in the same period.

McDonald’s Chief Executive Don Thompson warned in July that the shaky global economy would continue to pressure McDonald’s growth. But the McDonald’s menu rut underscores a larger problem facing the chain in the U.S., its largest market in terms of units: the company’s decade-old “Plan to Win,” a playbook for turning around its business by developing new menu items and remodeling restaurants, has run its course, investors and analysts say.

“They’ve gone about as far as they can with their menu,” says Scott Rothbort, who holds McDonald’s shares as president of LakeView Asset Management and portfolio manager at Covestor. He says McDonald’s needs a bold move, like opening McCafé coffee shops inside gas stations or developing a higher-end burger or ethnic chain under a different brand name.

The proliferation of new menu items—from oatmeal to Egg White Delight McMuffins to Premium Snack Wraps—has resulted in a crowded menu and complicated assembly process that has confounded customers and slowed service at the drive-through, where McDonald’s derives the majority of its U.S. sales.

QSR Magazine, a trade publication that conducts an annual drive-through performance study, said earlier this month that McDonald’s clocked its slowest average speed of service in the 15-year history of the study, at 189.49 seconds.

“Serving our customers quickly and accurately is always a focus of ours, and so we welcome the feedback from this survey,” a McDonald’s spokeswoman said.

Analysts and franchisees also say the company is confusing customers with its variety of price points. Last year, after McDonald’s was emphasizing items on its Extra Value Menu, Mr. Thompson said that turned off cash-strapped customers and that it would refocus its marketing efforts on the Dollar Menu. Now, the chain is testing another value menu called Dollar Menu & More.

“They don’t have a clear marketing message right now,” said Mr. Penney of Hedgeye Risk Management.

Mr. Stratton, the Nashville actor, said he finds McDonald’s menu “a bit overwhelming” and doesn’t try new items because he only goes to McDonald’s when he needs a quick, cheap meal. “I think people go to McDonald’s for value more so than trying new things,” he said.

The not-so-healthy approach to new products has worked wonders for Taco Bell, whose parent, Yum Brands Inc., credited the Doritos-based tacos with helping reverse the chain’s struggling fortunes. Taco Bell went from posting a 2% decline in U.S. same-store sales in the quarter prior to the tacos’ launch to a 13% gain in the full quarter after its introduction.

Still, some chains, like Burger King Worldwide Inc. have tried to emulate McDonald’s by adding smoothies and salads to the menu. Burger King last month introduced “Satisfries,” fries with less fat and fewer calories than the original fries, but it is too soon to know how well they’ll do.

Blockbuster products often require premium ingredients, which may be at odds with McDonald’s low-cost image. Wendy’s Pretzel Bacon Cheeseburger costs $5.59 in Chicago. McDonald’s recently stopped selling its line of premium Angus third-pound burgers, which cost upwards of $4.

“It may be that McDonald’s doesn’t have permission from their customers” to offer a blockbuster new product “because their customers are looking to them for value,” says Sanford Bernstein analyst Sara Senatore.

“After many years of McDonald’s beating up everyone else, we’ve seen that reverse,” Ms. Senatore adds. “Competitors are getting their act together.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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