McDonald's is losing fierce fast-food fight

McDonald's culture needs changing: Peltz
McDonald's culture needs changing: Peltz
How to improve McDonald's? Technology: Cramer
How to improve McDonald's? Technology: Cramer
All-day McDonald's breakfast to the rescue?
All-day McDonald's breakfast to the rescue?

In the fast food fight for customer spending, one restaurant giant is struggling while rivals scoop up diners' dollars.

Last week, McDonald's reported its global comparable sales fell again, dropping 0.7 percent in the second quarter. Meanwhile, comps at Burger King rose 6.7 percent in constant currency while Arby's comps rose 7.6 percent during the second quarter. Several other large restaurants are also showing positive growth.

"It seems like the only big player doing negative numbers, period. They're in a healthy market but they're not participating in that market," said David Palmer, analyst at RBC Capital Markets, in a phone interview.

This comes after several blockbuster years at the chain where it delivered a string of mid-single digit comp increases in the 2000s after a successful previous turnaround plan called "Plan to Win."

In its domestic unit, McDonald's comps have lagged its fast-food sandwich peers (a group that includes Arby's, Burger King, Carl's Jr., Jack in the Box, Wendy's, Sonic and Subway) each month since October 2013, according to data that its investor-relations team provides to analysts using data from The NPD Group.

McDonald's declined to comment for this article.

"Our leadership addressed our performance on the last earnings call, and you can use that as the best source of information for what you're looking for," spokeswoman Becca Hary wrote in an email.

McDonald's has acknowledged that results "remain disappointing," although the chain is seeing early signs of momentum. It forecast global comps would turn positive as China continues to recover following a supplier issue that dented sales beginning in 2014. The international lead markets group, including France, Germany, the U.K., Canada and Australia, is also gathering momentum, said CEO Steve Easterbrook on the recent call.

At the center of this underperformance has been McDonald's value perception in the U.S.

Following McDonald's decision to move away from the dollar menu and emphasize other value platforms like the "dollar menu & more" menu, which includes items costing more than a dollar, and "extra value meals," it has struggled with its pitch to customers.

"The bottom line is McDonald's has increasingly been losing share over the last three years. The biggest reason is they walked away from one of their core-brand equities: value," Palmer said.

The problem is one that McDonald's is acutely aware of, and the company is enacting a wide-ranging turnaround plan to regain momentum in its business. On its last conference call, "getting back to value" was a key element of its strategy for turning around its U.S. business.

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Palmer says the chain has not had as much breakthrough marketing and innovation as some of its peers.

McDonald's status as the largest restaurant chain by sales amplifies the boost its underperformance gives to other small chains.

McDonald's may continue to tread water: BTIG
McDonald's may continue to tread water: BTIG

For example, McDonald's generated $27.4 billion in revenue in fiscal 2014 while competitor Sonic saw revenue of just $552 million. Even just a small slice of McDonald's sales could be a big boost for Sonic numbers.

"With McDonald's having that many more stores than their peers, when they lose a little bit of share, it goes a long way in helping their peers," said Will Slabaugh, managing director at Stephens, in a phone interview.

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Slabaugh sees Burger King as the biggest beneficiary of McDonald's shrinking sales.

Burger King, like many of its peers, has grown increasingly competitive, with deals like 10 chicken nuggets for $1.49 or a two-for-$5, mix-and-match sandwich deal.

"I think it's not all McDonald's self-inflicted wounds," said Matt DiFrisco, senior restaurant analyst at Guggenheim. "I really do credit the overall competitive environment as getting better."

While McDonald's has warned investors that its turnaround could be bumpy, Easterbrook expects global comps to turn positive in the current quarter.

"We could see them stabilizing their share losses by the end of the year," Palmer said.

Broadly, though, Wall Street is advising a wait-and-see approach with roughly two-thirds of analysts placing a "hold" rating on the stock, according to FactSet data.