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Nobody's Lovin' McDonald's Lately


Ominously, millennials are lovin' its burgers even less than their parents do.

Even McDonald's (NYSE:MCD) franchisees are having a hard time lovin' it lately.
Janney Capital Markets reported this week that the fast food company's franchisees have a more negative outlook on their own business prospects for the next six months than has ever been recorded in the company's survey, first conducted in 2003.
Based on those survey results, Janney forecast a 2.6% drop in June same-store sales, and a 1.8% drop in July. It dropped its estimate for the company's stock to $96, from $98.
On Wednesday, after the report's release, McDonald's stock fell more than 1%, closing regular trading for the day at $99.27.
McDonald's stopped counting the number of burgers it has sold years ago, leaving their count at "Billions and Billions Served." Best estimates are that the company passed the 300 billion mark sometime last year.
That's a lot of burgers over the counter. But while its newer rivals continue to grow in both reach and profit, McDonald's has stalled in the US. Its US same-store sales declined for six months until last April, when they were merely flat.
And as it approaches its next quarterly earnings reporting date on July 22, the ubiquitous fast food chain has never been less popular.
Moreover, the demographics may not be in its favor going forward. In the latest issue of Consumer Reports, McDonald's comes in dead last in rankings of 21 burger chains by more than 32,000 of its subscribers. To be fair, Burger King (NYSE:BKW) barely squeaked by its larger rival.
In fact, McDonald's was one of the lowest-rated of all fast food restaurants. With separate categories rating chicken and pizza outlets, Mexican and Chinese chains, and (non-burger) sandwich places, McDonald's rating was lower than all but three names. The worse-rated restaurants were Sbarro, which filed for bankruptcy last March, KFC (NYSE:YUM) and Church's Chicken.
Consumer Reports points out that young adults are leading the way out of McDonald's. It found that millennials like to eat out often, and are willing to trade fancy food and table service for lower prices so that they can eat out more frequently.
But they don't put the highest priority on low price. They want quality, too.
McDonald's higher-rated rivals in the burger biz are names like Five Guys and Smashburger, miniscule chains in comparison but ones that are growing fast. The top-three in the rankings are virtual unknowns outside their regional roots: In-N-Out Burger and HabitBurger Grill, both of which are expanding eastwards from California, and Culver's, which launched in Wisconsin.
McDonald's has built its business on ubiquity. With 14,000 or so franchises in the US, it's the closest place to eat for almost everybody.
Millennials are letting it down there, too. They rate quality over convenience, and are more willing than older consumers to travel to get a better burger, according to Consumer Reports.
They're traveling to get other varieties of fast food, too. Surprisingly, Janney Capital, in a separate report, predicts that Chick-fil-A will represent a serious competitive threat to McDonald's over the next 10 years.
Wall Street doesn't cover Chick-fil-A much since it's a privately-held company. But the report points out that the chicken chain has been growing at an impressive compounded annual rate of 12.7% since 2003. Its sales have already edged past KFC, making Chick-fil-A the chicken champ of the US.
There's one big "but" attached to all of the above: It's all about the domestic US market. While McDonalds' domestic sales were down 1% in May, they were up 2.5% across the Asia/Pacific region, the Middle East, and Africa, and up a more modest .4% in Europe.
The company acknowledged that it has "broad-based challenges" in the US. But so far, it hasn't traveled abroad. Smashburger, and even Chick-fil-A, have a long way to go before they challenge McDonald's in Beijing.
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