Why Is It Important For McDonald’s To Focus On Quality?

In Q2 2015, McDonald’s‘ (NYSE:MCD) global comparable sales declined 0.7%.  This figure was -2% for the U.S. and -4.5% for the APMEA region.  The decline in comparable sales now seems to be a common highlight of the company’s results (Read Fifth Consecutive Negative Comp. Sales Quarter Looking Over McDonald’s). McDonald’s is losing its existing customers to competition and its turnaround plan has not shown any immediate results.  Loss of reputation seems to be weighing on its business, and McDonald’s in its current form is losing some of its popularity.  A renewed focus on the quality of its products, and food safety, should help McDonald’s regain its customers.

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Japan Meat Scandal Still Impacts Asia

A region-wise comparison of same store sales for McDonald’s over the past 6 quarters is given below.

Apart from US, Europe, and AMEA, global comparable sales in the above table include  other countries such as Latin America, Canada, and the corporate segment of McDonald’s.

We note that while McDonald’s was gaining customers in Asia in the first half of 2014, after the meat supplier scandal its same store sales declined significantly, and are not showing any significant signs of recovery. Customers viewed McDonald’s in Asia as a company which lacked a focus on food quality.  This reputation loss appears to have led to a significant loss of customers in the APMEA region.

Declining Reputation Score In the U.S. Market

A recent report by the Reputation Institute ^[1] mentions that on a scale of 1-100 McDonald’s reputation score declined to 55.3 in 2015 from 64 in 2014. Chipotle on the other hand increased its score to 74.2 in 2015 from 69.4 in 2014.  Chipotle’s “Food with Integrity” approach has been viewed positively by customers.  Its recent action to stop serving pork in its restaurants till it finds a pork supplier meeting its strict requirements went down very well with its customers and investors. McDonald’s, on the other hand, suffered reputation loss due to the meat scandal in Japan.  In the U.S. consumers are shifting towards healthy food options. McDonald’s move to use chicken raised without antibiotics should have a positive impact in the long run.

The number of customers per McDonald’s restaurant is a key value driver for its business.  The impact of change in this figure on McDonald’s valuation can be analyzed below.

The recent move by competitors to focus on quality and McDonald’s slow response to food safety concerns has impacted its reputation in the U.S. and Asia.  This has had a direct impact on its comparable store sales.  While the company has a turnaround plan in place, serious measures to demonstrate its focus on quality are needed to salvage the situation.

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