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And just like that, McDonald's (MCD) is now a game-changing upstart restaurant chain, with a stock that is a can't-miss investment.
At least that would be one's sense after reading all the media coverage of Mickey D's big investor day on Wednesday. I have to tip my hat to McDonald's communications team (led by former Obama press guy Robert Gibbs); they indeed set up an event chock full of buzzy, optimistic talking points for the media to make upbeat listicles. Heck, they even acknowledged why they are failing -- the company's U.S. president flat out admitted the chain has lost an astounding 500 million transactions since 2012.
How doesn't that work well in a headline? Such a headline would, in turn, lure a reader into all of the positive things the company is doing to reverse what is already known: McDonald's has become irrelevant to so many people, in so many places around the world.
To be sure, the way the event was covered by the media is embarrassing. No one that I saw was super critical of the company, almost completely forgetting the current state of the business. No one questioned how McDonald's by the end of this year would successfully pull off some serious operational challenges. Nope; very little questioning done at all. Suddenly, McDonald's is an upstart restaurant with no legacy issues and a platform that is about to benefit from the shift to digital buying of food.
Well, all of that is absolute nonsense. McDonald's isn't an upstart chain, rather it's a chain hated by so many people. It's a chain where the now 18-year-old makes fun of Ronald McDonald on Instagram while sitting inside a Starbucks (SBUX) , before heading to lunch at Chipotle (CMG) .
Since there was a lack of critical coverage of investor day, I thought it would be a good idea to bring a dose of reality to the situation. While McDonald's should be commended for at least trying to change -- unlike dying Sears Holdings Corp. (SHLD) -- to me, I would still rather eat a rancid Big Mac than own shares in the company.
A couple of my talking points:
Digital ordering push will bring huge issues:
McDonald's will go live with mobile order and pay at 20,000 restaurants in the fourth quarter. Media took that as if McDonald's will flip a switch and suddenly a flood of sales will come back. In effect, McDonald's would instantly become the Starbucks of hamburgers and in the process crush mobile ordering pioneer Domino's (DPZ) (where 60% of orders are done via some form of mobile devices). People, it doesn't work like that. McDonald's will have huge issues with the rollout of mobile ordering, given the already high volumes of people coming into its stores and waiting in the drive-thru. The company could see a dramatic increase in ticket times and pissed off people, as stores become even more congested.
"There will be stress on the system and it will take time for consumers to use the mobile app, then it will only be a small portion that will use it," veteran restaurant analyst Howard Penney over at Hedgeye Risk Management tells TheStreet.
McDonald's could also see a big-time increase in employee turnover. What person wants to do quadruple the amount of work, much faster, while getting paid the minimum wage? TheStreet's Lindsay Rittenhouse has a great piece on the risks to McDonald's from mobile ordering.
About that new food:
So McDonald's will roll out a new line of premium "signature" burgers. It will also, reportedly, hit the gas pedal on bringing to market new innovative food with better ingredients. To that end, McDonald's has begun to test using sustainable beef (it does taste a little better). All of that is fine and good, if McDonald's was a Shake Shack (SHAK) with a highly engaged youthful customer base that visits multiple times a week.
As a result of the legacy issue of poor customer perception, McDonald's food "innovation" could very well fall on deaf ears with the people it needs in its stores the most -- the next generation of eaters. I would like to think of myself as part of that group and rather level-headed. McDonald's could serve up a new burger with grassfed beef, an organic potato bun, organic veggies and a Greek yogurt sauce and I still wouldn't give it a try. I don't trust McDonald's is using the very best ingredients like the better burger chains. I don't trust that I will take 15 minutes out of my life, walk into that restaurant for the sandwich and leave feeling "wow, what an amazing sandwich, worthy of an Instagram pic or snap on Snapchat."
While more premium food may appeal to lapsed McDonald's lovers, the company will find it very difficult to cultivate the next generation of eaters. Hence, the company needs to open a new concept or start acquiring better upstart food chains in order to begin to reverse consumer perception.
In light of these fundamental challenges (and hosts more, which I am not getting into right now), McDonald's shares at almost 20x forward earnings on a P/E multiple basis, are not tasty at all -- on the contrary, they're unsettling to one's stomach.
Jim Cramer and the AAP team holds a position in Starbucks for their Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells SBUX? Learn more now.