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What Wal-Mart Can't Learn From McDonald's

Stocks in this article: MCDWMTAMZN

NEW YORK ( TheStreet) -- Wal-Mart Stores (WMT) and McDonald's (MCD) both outperformed the broader market during the recession but, as the economy recovers, McDonald's is leaving Walmart in the dust.

Expect this trend to continue. That's because Wal-Mart has essentially one thing to offer: low prices. Customers don't feel good about shopping at one of Wal-Mart's stores; despite efforts at revamping its image, the retailer is still seen as a downright cruel employer. The bribery scandal in Mexico certainly didn't help matters. And its vast, horribly-designed stores -- despite obligatory efforts at a revamp, still make customers feel like cattle being guided toward the slaughter (check-out line).

McDonald's, meanwhile, has got its groove on. It's got premium coffee -- an expense that, ingeniously (OK, ruthlessly, if you like), it gets franchisees to pay for. It also, increasingly, has some pretty cool-looking new restaurants.

At first blush, the bid by McDonald's to move upmarket seems strange. But it actually works. If you think about it, why shouldn't it? McDonald's was founded in the 1940s -- when America was at its best. Going to the drive-in wasn't a necessity: it was a cool thing to do -- a sign of wealth and youth and strength. Yes, McDonald's became ugly and cheap as the country lost its way, but now it appears to be doing what it can to return to its roots.

McDonald's restaurants outside the U.S. have been in good shape for many years. The company realized it had no choice if it wanted to lure customers away from what was familiar to them. But lately, McDonald's U.S. business has made impressive gains -- a fact noted by several analysts following the company's most recent earnings release.

Wal-Mart, founded in 1972, can't harken back to its glory days, because it has no glory days. Wal-Mart was founded upon an idea of weakness. The American middle class was getting poorer, so the company would give it cheaper stuff. Meanwhile, its relentless cost-cutting would send jobs to the cheapest possible places in the world, accelerating the economic decline of the middle class and so creating more customers for itself.

Wal-Mart was the subject of a bullish report from Bank of America Merrill Lynch on Wednesday, but analyst Robert Ohmes has it wrong. He notes Wal-Mart is opening more stores and improving its e-commerce business, but who is he kidding? More stores doesn't mean more sales for a market as saturated as Wal-Mart's. And the day Wal-Mart beats Amazon in e-commerce is -- well, it just ain't gonna happen. Ever.

Now that the American middle class appears to be rebounding, it will happily leave Wal-Mart and its cheap, degrading stores on the side of the highway. McDonald's, on the other hand, may still be cheap, but at least it's doing a better job of hiding it.

-- Written by Dan Freed in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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