Chipotle's Loss Is McDonald's Gain

Many investors were writing off McDonald’s (MCD) last year but the company staged an impressive turnaround and ended the year in green. McDonald’s is off to a decent start this year as well, and much of the credit should be given to the new CEO Steve Easterbrook.

It is not a coincidence that just after the replacement of ex-CEO Don Thompson, the company’s shares headed in the right direction and escalated around 30 percent as compared to the S&P 500’s loss of 1 percent. Easterbrook’s initiatives have played out well for the company and investors can expect the stock to be a safe investment as long as he is in charge.

In the most recent quarter, McDonald’s US comps surged 5.5 percent on a year-on-year basis, mainly due to its latest McPick 2 menu and All-Day Breakfast.
Easterbrook is taking back the company on the right track by introducing new innovative ideas. On the other hand, McDonald’s is also analysing products like fries, preservative-free Chicken Nuggets, and a larger Big Mac labelled as Grand Mac.

However, even with the support of these innovative ideas, it is unlikely that the company will continue growing same-store sales at the same rate in the long-term. Although the company should be applauded for the strong quarter after a long time, there was a massive positive tailwind for sales.

Chipotle Mexican Grill (CMG) posted a same-store sales decline of around 30 percent mainly due to the issues regarding the company’s food safety disgrace. A percentage of this mandate, specifically in the lunchtime daypart, likely went to opponents. The dip in Chipotle’s sales probably helped McDonald’s in the recent quarter.

According to a survey, when customers were asked which restaurant they would prefer to visit instead of Chipotle, Yum! Brands’ Taco Bell, Panera, and McDonald’s were the top three most-popular substitutes.

However, Chipotle Mexican Grill has shifted all its focus on food-safety measures and is headed on the right track. In the imminent second quarter, Chipotle should carry on to achieve back market share as trepidations regarding its food safety decline. Although it will take some more time to develop a healthy reputation, McDonald’s can linger to gain benefit from Chipotle’s struggles.


It will probably take Chipotle a few more quarters to recover its brand image and gain back consumers’ trust. Till then, investors can expect McDonald’s to report strong comps growth. Moreover, the weak comparisons from last year also help McDonald’s post strong comps growth. But this is only a short-term tailwind and investors can capitalize on it by being on the long side of the McDonald’s trade.
Published on May 11, 2016
By Akshansh Gandhi

Copyrighted 2016. Content published with author's permission.

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