For every consumer product in the world, there is always a brand that is synonymous to that product.
Soft drinks make you think of Coca Cola,
Fried Chicken make you think of KFC,
And baby products make you think of Johnson’s & Johnsons.
So naturally, when we say fast food, almost everyone will think of…
that’s right… McDonalds!
Crispy French Fries, juicy Quarter Pounders, the good ol’ Big Mac and Happy Meals;
these and many other items on their menu have become comfort food for people across the globe
and almost nothing else can calm a traveller who’s struggling with the exotic cuisine in another country, than the sight of the golden arches.
Some of us, on the other hand, remember McDonald’s as a reward for good behaviour as a child.
Maybe we’ve earned good grades in school…
or maybe we’ve behaved exceptionally well at a dreaded event.
Regardless of what it was, all we were vying for was the Happy Meal and the toy that came with it.
Known as the biggest fast food chain in the world, McDonald’s started its business in 1940 by the McDonald’s brothers and was later taken over by businessman Ray Kroc.
Today, they boast 35,000 outlets around the world, and sells 75 hamburgers every second.
Unfortunately though, that’s where all the fun and folly stops.
For the past 5 years, their revenue has been going down consistently,
and looking deeper into their numbers, here are 3 other reasons why we don’t want to invest in McDonald’s right now.
1. Share repurchase using US$10b debt
For the benefit of new investors, share repurchase is basically an exercise where a company buys their own shares off the stock market.
Some companies do this to demonstrate faith in their own business, and sometimes signal an impending growth in the business.
That’s the reason why some investors are always looking out for share repurchase exercises.
In McDonald’s case however, this somewhat positive action is later trumped by the fact that they borrowed US$10b just to do this exercise,
a potential RED FLAG if there is one.
A healthy company would be able to repurchase their shares without taking such a big risk as they would have enough cash in their reserves for this.
2. Little to No Growth
If you’ve been to a McDonald’s recently, you would realise that they’ve spruced up the outlets.
and some of them even offer table service i.e. the staff would send the food to your table like a restaurant.
From time to time, they may offer a limited-time only menu items e.g. Smarties McFlurry or Nasi Lemak Burger.
But that seems to be as far as the growth goes.
For many years, and even up until now, the business has remained the way it is, with little innovation, change or new business ideas.
If you refer to WealthPark’s Star Chart, you can even see their Growth is reflected as “0”.
3. Lost Entrepreneur Spirit
3 years ago, a movie named “The Founder” was released.
With Michael Keaton at the helm, the movie depicted how the McDonald’s brothers started the now-giant chain and was later taken over by an aspiring businessman Ray Kroc.
Based on real-life events, we see how Ray Kroc shrewdly toiled and worked hard to expand the business to what it is today.
This fighting spirit, however, is now lost due to the rapid expansion and all that’s left is a set of operational methodology.
To quote Mark Tier in his book, “How To Spot the Next Starbucks, Wholefoods, Walmart, or McDonald’s Before Its Shares Explode”:
McDonald’s “federation of entrepreneurs” was the fruit of Ray Kroc’s genius. Unfortunately, the fast-food pioneer appears to be losing steam today, in part because that operational methodology grew incredibly fast, and its underlying essentials, the why of its success, were never made explicit.
And while McDonald’s may not have been the best example of a successful fast food chain from an investor’s point of view,
there are fortunately, others, which we found to be in better shape.
Using WealthPark’s “Peers” function, which allows us to filter for peers based on the different criteria,
we managed to find three other companies within the industry that has healthy business stamina and would comparatively be better options for investors as compared to McDonald’s.
1. Ohsho Food Service Corp.
Filtered by: Gross Profit Margin (%)
This Kyoto-based company is now operating and franchising a chain of Chinese restaurants under the Gyoza OHSHO brand in Japan and has a network of 700 odd restaurants around the country.
2. Yum China Holdings, Inc.
Filtered by: “SC type” (Star Chart)
A holding company which owns, operates and franchises restaurants in China, this company is responsible for the international fast food chains in China like KFC, Pizza Hut, Taco Bell, East Dawning, Little Sheep, and the COFFiiand & JOY brands.
3. Restaurant Brands International Limited Partnership
Filtered by: Return on Equity (%)
As the name suggest, this company is a collection of quick service restaurants brands. Currently, the Toronto-based company operates through three main segments: Tim Hortons, Burger King, and Popeyes.
McDonald’s may still be serving the most famous burgers and McNuggets for now.
However, as we can see, from a business’ perspective, their peers can certainly give them a run for their investor’s money.
As for us investors, there is ALWAYS an opportunity around the corner if you know where to look.
A business you’re looking at may not seem like it’s in the best shape,
but that ALMOST ALWAYS means that THERE ARE PEERS AROUND THE CORNER THAT’S SCOOPING UP THEIR BUSINESS.
You only need to know where and how to look.
Disclaimer: All facts and opinions presented are for educational purposes only. This is not a recommendation to buy or to sell. The author(s) involved in the writing of this piece do not have current vested interest of the company. Please consult a competent professional for expert financial, or other assistance or legal advice.