An Urban's Rural View

Miracle of miracles: McDonald's, given up for dead a year ago, has resurrected itself.

To be sure, it never truly died. It just suffered five quarters of declining sales, fell out of favor with Wall Street and had to sack its CEO. Even at its nadir, Mickey Ds was the world's largest restaurant chain. (Subway has several thousand more restaurants than McDonald's 35,000 restaurants but its worldwide sales fall billions short of McDonald's $28-plus billion.)

The stock market being the sensationalism-addicted, story-driven creature that it is, we shouldn't be astonished that small slips in sales turned into exaggerated reports of a company's demise. What's surprising is how thoroughly the turnaround has made so much of last year's "what ails McDonald's" commentary look silly.

The burger chain, analysts were saying just a year ago (http://tiny.cc/…), had failed to respond to the "global movement towards healthier food." It had lost luster with millennials. It had -- horrors! -- used 19 ingredients in its French fries. If McDonald's new CEO had heeded much of this criticism, he would have spent the year trying to mimic the restaurant chain that at the time was Wall Street's darling: Chipotle.

Instead, the new boss, Steve Easterbrook, decided to make McDonald's more like McDonald's. "Let them eat Egg McMuffin—whenever they wish," he declared, and Egg McMuffin eaters beat down the doors. Thanks in large part to this new "all-day breakfast policy," sales are up and MCD (the company's New York Stock Exchange symbol) is now, according to Market Watch, a "rock-star stock," its price having jumped 30% in 2015 (http://on.mktw.net/…).

Meanwhile, Chipotle -- well, let's just say it's no longer a Wall Street darling. Funny how a few well-publicized scrapes with E. coli, salmonella and norovirus can dull the shine of a restaurant stock (http://tiny.cc/…). From its highs last August, Chipotle's share price has plummeted more than 40%.

This story -- two restaurant companies trading places in the stock market's esteem -- has more than one moral. The first is that investors should be wary of story stocks. The analyst's "story" is sometimes little more than an after-the-fact rationalization for a price change that may or may not be rational.

McDonald's is no exception. Already you can see pundits spinning stories to explain the upswing in sales. McDonald's is now, according to one story line, "listening to its customers," who have been demanding all day breakfast for years (http://tiny.cc/…). Maybe, but you have to wonder. Had the company really stopped listening previously? Or -- as so often happens in business -- did the new CEO figure out what customers wanted before they knew they wanted it?

Another story line holds that business is picking up because breakfast is a "lower-cost option," and McDonald's is using lower food costs to do more "stepped-up, value-based marketing" generally (http://on.mktw.net/…). Cynical translation: Analysts have abandoned last year's story that restaurant-goers want "natural" food in favor of a new story that says they want "value-based" (read: inexpensive) food.

Granted, I'm painting with a broad brush. Not every analyst bought into the "global movement toward healthier food" story. At least a few thought McDonald's biggest problem was an unwieldy menu that was slowing down service. And they were, at least in part, right. Next to all-day breakfast, streamlining the menu was the next biggest contributor to McDonald's turnaround.

That leads to the second, broader moral: The world of food, like so many other worlds, is increasingly segmented, providing opportunities for different strokes to serve different folks. Some folks want healthy and natural. Some want inexpensive, no-wait burgers and fries. And some want some of each, depending on time and place and mood. The trick for those who serve up the strokes is to know their niche. McDonald's took something many people already liked -- inexpensive breakfast fare -- and gave them more of it.

There's a third and final moral: Success is fleeting. The breakfast boom may prove a passing fad. If instead it stays on as the new gold in the Golden Arches, it won't take long for competitors to start doing some gold mining themselves.

In stories, people live happily ever after. In business and the market, there's no such thing as ever after. Happy reading.

Urban Lehner

urbanity@hotmail.com

(CZ)

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