Are Innovative Beverages Enough to Turn McDonald’s Around?

McDonald’s (MCD -1.25%) is making a bold bet that new, innovative drinks can spur much-needed growth. The fast-food giant has been testing new beverages in select markets and will introduce even more interesting options this fall. Most notably, a new line of energy drinks in collaboration with Red Bull will hit stores in mid-August.

Unfortunately, I do not believe the novelty drinks are enough to solve the stagnant-growth crisis facing McDonald’s and many of its peers in the industry, as well as across the broader consumer discretionary sector.

Today’s Change

(-1.25%) $-3.45

Current Price

$272.25

Key Data Points

Market Cap

$193BMarket cap calculated using publicly traded shares outstanding only. Does not include unlisted, private, or dual-class non-traded shares. Implied market cap may vary.

Day’s Range

$272.15 – $278.37

52wk Range

$260.96 – $341.75

Volume

4M

Avg Vol

4.6M

Gross Margin

57.38%

Dividend Yield

2.70%

McDonald’s is in the middle of its turnaround, internally called >NEXT. The strategy aims to simplify operations while adding new and improved menu items. So far, results have been mixed, but analysts remain cautiously optimistic.

Beverages are a worthwhile focus for the fast-food giant. They are high-margin menu items, but drinks alone won’t cut it. Consumers are extraordinarily value-conscious and price-sensitive. Value meal promotions have helped increase sales, and this is really where McDonald’s can make a difference, in my opinion.

Image source: The Motley Fool.

Fast food prices are no longer the bargain they once were. While gimmicky drinks and promotions are temporary fixes, consumers really just want to know they are getting a tasty meal for a reasonable price. This, combined with cost cutting and increased operational efficiency, will really move the needle. The novelty of a new energy drink will wear off quickly, but giving customers a substantial meal for their hard-earned dollars won’t.

McDonald’s stock remains a decent purchase for long-term investors, despite challenging macroeconomic conditions. The company is durable and globally dominant. It also generates significant cash, paying a solid dividend of $7.44 per share annually. That’s approximately a 2.75% yield.

I’m confident McDonald’s can navigate near-term struggles and return to its roots as an affordable option for hungry customers on the go, but it may not happen this year or next.