McDonald’s continued struggle for sales growth

First McDonald's restaurant in Des Plaines IL USA - now a museum.
First McDonald’s restaurant in Des Plaines IL USA – now a museum.

Every decade we are closer to the dystopian future painted by Daniel Waters, Robert Reneau and Peter M. Lenkov in the 1993 film Demolition Man starring two times Academy Award Nominee Silvester Stallone and Academy Award Winner Sandra Bullock where all the restaurants in the world are Taco Bell.

Taco Bell has come a long way since 1962 and is currently the second most profitable restaurant franchise in the world with annual profits of $1.6 billion including KFC, Pizza Hut, WingsStreet and East Dawning.

Only 6 restaurants in the whole world are large enough to stop Taco Bell from buying every restaurant in the world: McDonald’s, Starbucks, Compass Group, Tim Horton’s, Darden Restaurants and Chipotle Mexican Grill.

McDonald’s is already the most profitable restaurant in the world with annual profits of $5.5 billion or more than the next six largest restaurants combined.

McDonald’s is already opening new restaurants everyday in 119 countries and the only way to increase annual profits to $10 billion in two decades is to buy the competition.

This long term strategy will require at least $100 billion to buy Darden Restaurants for $6.4 billion, Tim Hortons for $7.9 billion, Chipotle Mexican Grill for $10 billion, Compass Group for $23.1 billion and Starbucks for $43.2 billion

Assuming annual profits will remain constant which is highly unlikely because more countries will charge more taxes to McDonald’s to feed the unemployed in the near future. It would take about 20 years to make that kind of money to buy everybody else with the exception of Taco Bell which cannot be bought because we now have laws that prevent monopolies.

It seems the last men standing will be McDonald’s and Taco Bell. Unless of course, politicians decide to write new laws to prevent a duopoly. In that case, Starbucks would survive as a third very strong competitor.

At current rates, it would take McDonald’s almost a year to save enough cash to buy Darden Restaurants. Obviously, Darden Restaurants is not going to let that happen and is very busy reinvesting $400 million each year to buy its own shares to artificially inflate the stock price to make it more expensive for McDonald’s to buy the entire company.

If the price just keeps going higher and higher then McDonald’s cannot buy them.

As you can see, there is a tremendous amount of pressure for the CEO of Darden Restaurants to increase annual profits each year or he might lose his own job. At the same time, the CEO of McDonald’s is also in a similar situation because he needs to increase annual profits from the current $5.5 billion to $6.4 billion to buy the weakest competitor.

Burgers are already cheap. You cannot reduce the current price to sell more of them because that would reduce annual profits.

New restaurants are being built every single day as required by a larger global population. You cannot open more new restaurants to sell more burgers because that would reduce annual profits.

The only thing that you can do is: Fire an employee that makes $7.25 in McCallen, Texas and replace him with a hungry employee that lives in Reynosa, Tamaulipas and has to cross the border every single day and he is willing to work for just $3 – which in this industry is not a feasible national strategy.

You cannot pay a worker less than $7.25 in Texas but you can hire a specialized cleaning company to wash the bathrooms for just $3. This specialized cleaning company probably has a $300,000 contract with McDonald’s to wash thousands of bathrooms and McDonald’s will not breaking any laws because none of the Mexicans are actually employees of McDonald’s.

But all of these measures have limited effect and only impact the business bottom line, while the top line stays the same or in this case continues take impact as the population is getting more health conscious and public taste is evolving.

The only probably strategy in this scenario that the management can consider is to cannibalize competition that have growing top-lines and operate in lucrative market segment.

Technology, efficiency, cost reductions, optimizations will can only take business so far, in the end a business with a sound business strategy and strong internal controls will have an edge and succeed.

McDonald’s continued struggle for sales growth
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