McDonald's and the McCafe

Conventional wisdom says McDonald’s should continue to have great success as the economy slows and consumers trade down restaurants just as they’ve been trading down to Wal-Mart for their shopping needs. Sounds great, except that the company's insiders beg to differ: Over the last six months, nearly 760,000 shares worth some $43 million have been sold.

A significant amount by any measure, this works out to roughly a 20% liquidation of the insiders according to Thomson Financial. CEO James Skinner sold 35% of his stake. Gloria Santona, the general counsel, parted with more than half of her shares. Jose Armario, responsible for Canada and Latin America, traded away 80% of his holdings.

My guess is that they’re less than confident about the big McCafé push. Better drip coffee is one thing, and McDonald’s definitely has good drip coffee. But going head-to-head with Starbucks is another. Don’t kid yourself: McDonald’s will never be Starbucks -- and by the look of things it probably doesn’t want to be Starbucks anyway. There just isn’t any synergy between burgers, fries, and cappuccinos.

Consider demographics and brand personality. Starbucks is urban, born in Seattle, and populated by graduate students looking for single-origin coffees from Africa. McDonald’s is Mainstreet U.S.A., packed full of blue-collar men, moms and kids, and broke teens ordering off the dollar menu. If you can’t picture a truck driver from Wyoming ordering a double-pump vanilla non-fat latté, then McCafé is doomed -- especially with all the competition entering the field.

That isn’t to say all hope is lost. Going upscale with better chicken items, salads and fruits, and remodeled restaurants has been successful. Better quality hamburgers featuring Angus beef are being tested in select markets. Efforts should continue to focus on improving and expanding the food offerings, taking into account the lessons of the Arch Deluxe failure.

McDonald’s head chef Dan Coudreaut, labeled the “Most Powerful Chef in America,” has already demonstrated success with the Asian Salad and McSkillet Burritos. Given the continued emphasis on fitness and health in society, there is a big opportunity for McDonald’s to clean up its image. Offering fresh vegetables in Happy Meals would be a good start. Bringing back the deli sandwiches would be another.

Until then, rising food prices will pinch margins hard, sales will drag, and free cashflow will be tied up in the coffee fiasco. Maybe shares won’t tumble, but it’s hard to see them going much higher from here.