3 Problems McDonald’s Has That Raising Wages Won't Solve

 

NEW YORK ( TheStreet) --  McDonald's (MCD) made a big splash on Wednesday by announcing that it planned to raise worker pay at the outlets it operates by more than 10%, following similar moves by Wal-Mart (WMT) and Target (TGT) to raise the wages of some of their lowest-paid workers.

According to The Wall Street Journal  (paywall), starting on July 1, McDonald's will pay at least $1 per hour more than the local legal minimum wage for employees at the approximately 1,500 restaurants it owns in the U.S. The Golden Arches also operates more than 13,000 restaurants in the U.S. via franchise agreements under which these restaurants are free to set their own wages.

Earlier in the week, McDonald's also grabbed headlines by announcing that it would test all-day breakfasts in the San Diego area. It marked one of the first significant changes under new CEO Steve Easterbrook, as breakfast has historically only been sold until 10:30 a.m.

But McDonald's -- and Easterbrook -- are still in a land of trouble despite these recent high-profile maneuvers.

From the taste of its fattening hamburgers to the preparation methods of its foods, McDonald's has plenty to do to engage in real battle with hot upstart better burger chains, including Shake Shack (SHAK), or crafty regional players such as Sonic (SONC).

California-based Fatburger, which has been around since 1952 and now has about 200 restaurants in 32 countries, is likewise going after some of the same customers. Approximately 350 restaurants are planned for development by existing Fatburger franchisees over the next several years.

TheStreet takes a look at what's ailing McDonalds beyond just what hiking wages and serving all-day breakfast can solve.

1. You generally can't see your food being made there.

More than ever, diners today want to know the origin of the ingredients in their food. Telling a story of only offering responsibly raised chicken, pork and beef has been a fundamental of burrito and salad bowl chain Chipotle (CMG) since being founded by Steve Ells. But even if the items in a burger aren't from an organic farm or hormone- and antibiotic-free cattle ranch, consumers seem to think that's acceptable as long as they can watch their food being prepared.

But seeing that process play out is not the norm at most McDonald's restaurants, where ingredients and food preparation are often hidden behind mounds of kitchen equipment.

At Fatburger, by contrast, workers use fresh, not frozen, beef patties for the chain's burgers, and they're made to order in front of customers. The opportunity to watch your food being prepared is similar at Shake Shack, where its small, burger stand like restaurants tend to have prep stations and grills close to the cash registers.

At Sonic, meanwhile, consumers are not apt to watch their food being constructed as it's usually delivered to their parked car via a carhop. On the other hand, Sonic's recipe for success is more a result of order customization. "The customer, in our case, is not coincidental to the food preparation process, they drive the preparation process. For some of our competition that is not true, they are estimating what the needs are going to be and then make the food beforehand," pointed out Sonic Chairman and CEO J. Clifford Hudson in a Nov. 10 interview.

2. McDonald's signature flavors may no longer be what consumers crave.

Who hasn't heard of McDonald's "special sauce" for its signature Big Mac sandwich? The sauce, rumored to include mayonnaise, sweet pickle relish, onions and French dressing, has achieved such iconic status that a "limited edition" bottle of it recently sold for upwards of $18,000 on EBay.

But despite its place in folklore, weak sales at McDonald's hint at consumers no longer thinking the sauce is really so special anymore. And they may be wondering why the Golden Arches has not created signature sauces for its other burgers, leaving run-of-the-mill condiments found in squeeze packets to punch up the flavor. As a result, customers are gravitating to more interesting flavors found on signature burgers at the better burger chains.

Shake Shack's secret signature "Shack sauce," for example, is a slightly spicy, sweet and sour blend of mayo, ketchup, mustard and various spices, while Fatburger seasons its lean beef patties with a proprietary spice blend and puts mustard, instead of ketchup, on them. 

"We sell a lot of burgers with an egg on them, back in the day they would call it the hangover burger," said Fatburger CEO Wiederhorn. Shack Shack's River North, Chicago location sells a Publican Park Sausage, which is sausage topped with cheddar and American cheese sauce and crispy ale marinated shallots.

For its part, In & Out Burger, the popular West Coast fast food chain, is known for heaping thousand island dressing on its burgers.

3. McDonald's is already a supersized operation.

McDonald's is a humungous organization in the U.S., operating some 14,000 plus locations across 22 different regions. In 2014 alone, 222 new McDonald's were opened in the U.S. This year, McDonald's plans to open more than one thousand restaurants primarily in China, the U.S., Russia and France, compared to 1,300 a year earlier.

The Golden Arches has amassed such a large amount of valuable real estate over the years that activist investors are itching for the company to create a real estate investment trust (REIT). By forming a REIT, the view on Wall Street is that McDonald's could unlock the value of its real estate empire, which is being held back by the lagging operating performance of its restaurants.

The "too big to grow" issue doesn't necessarily exist at the main rivals of McDonald's.

Sonic currently does business at 3,500 locations in 44 states, but about 10 states account for 60% to 70% of its sales. Hudson pointed to Sonic's potential to open new locations along the West Coast and Florida as part of a drive to add 1,000 new locations in the next 10 years. In total, Sonic projects it will open 50 to 60 restaurants over the next 12 months after opening 40 in its just completed fiscal year.

Fatburger's Wiederhorn noted that McDonald's is not opening in new markets around the world because they are more focused on markets they already operate in. That leaves an opportunity for a Fatburger or a Sonic to venture into markets where McDonald's may be under-penetrated or not even exist.

However, McDonald's giant size also means it takes a while for new ideas to be implemented and have an impact on sales. Wiederhorn concluded, "For us, we have the ability to be flexible. We came out with a skinny burger -- basically two patties, no bun, 300 calories -- (but) for McDonald's to do something like that, it's like moving a tanker instead of a speedboat."

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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