McDonald's Bull's Rebuttal
by Chris Rugaber ([email protected])

Rick, good tidbit about the Business Week restaurant survey, but you forgot one thing: no one goes to McDonald's for the food! Who cares if it finished 87th?

McDonald's understands that fast food is about convenience and impulse. That's why the company has built so many restaurants: the average American lives within four minutes of a McDonald's. Sure, if there's a Wendy's or a Burger King close by, I might go to one of those because I like the Whopper or I want one of those pita thingies Wendy's has, but all too often they're not close by, and few people really go searching for better fast food. If you have time to go out of your way because you want better food, you probably won't bother with fast food at all.

Your Nicaragua story captures several reasons why McDonald's will grow for many years to come -- as you note, it got there fastest. You deride this as the only thing McDonald's has going for it, but it's arguably the whole ball of wax. The point of the story I told earlier about Japanese children's reaction to McDonald's is that it demonstrates McDonald's ability to establish itself as a natural part of life for people elsewhere, just as it has in the States. Getting there first helps McDonald's do that. Burger King or Wendy's may taste better when they finally open an outlet in Nicaragua, but by the time they do, they'll already be fighting for second place, just as they are here in the States.

I will respond to your three-word argument regarding the rest of McDonald's international business ("rising dollar, bad"), which I think can be charitably described as insufficient, with three words of my own: "It won't last."

Your more important points relate to the quality of the management and future sources of growth. Perhaps I went a little far in referring to management as "nimble," but recent second quarter results show that even in the U.S. market, McDonald's can still grow earnings -- its 15% increase in operating income vs. the year-ago quarter was the highest rate of increase McDonald's has seen since the fourth quarter of 1984.

Furthermore, its 1997 return on equity (ROE), roughly measuring the company's return on its assets, was 18.6%, which is pretty good for a huge conglomerate. (Wendy's, for comparison purposes, was just 11%.) Looking at the stricter measure of return on invested capital (ROIC), McDonald's was approximately 10.7% last year, but based on the first six months of this year, that number will increase for '98. Dale Wettlaufer (TMF Ralegh) recently wrote a great five-part series on ROIC.

And McDonald's net profit margins may have stalled in the 14.4%-14.7% range in the past several years, but to talk about "falling margins" is to exaggerate.

Sure, McDonald's is not going to be a hyper-growth company, but it doesn't carry the corresponding risks either. While the company recently stated that its solid second quarter results may not continue for the rest of the year, that's a short-term concern. McDonald's has several sources of future of growth: continued expansion into international markets; increased profits from those markets as economies recover, in the case of Asia, or simply grow, in the case of Central Europe; increased domestic sales thanks to the "Made for You" production system; and better margins thanks to a streamlined central office. Even if only a couple of these pan out, investors probably won't be disappointed.

Next: The Bear Responds