Why Is McDonald's Suddenly Losing and Burger King Winning?

By Rich Duprey Markets Fool.com

Even before Burger King parent Restaurant Brands International (NYSE: QSR) made a pitch to acquire Popeyes Louisiana Kitchen, the fast-food restaurant operator was already embarking on a plan to vastly expand its footprint. CEO Daniel Schwartz told analysts, "There's no reason the Burger King brand can't grow at an accelerated pace in the U.S."

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That seems to stand in contrast to rival McDonald's (NYSE: MCD), which, though having more than 14,000 restaurants in the U.S., has seen its store count decline two years in a row. Part of that, of course, is due to McDonald's simply being about twice as large as its rival, which ended 2016 with fewer than 7,500 stores in the U.S. and Canada.

Image source: McDonald's.

Yet it also gives Burger King all the appearance of a winning attitude and McDonald's a posture of playing defense. Having put together a string of quarters enjoying higher comparable-store sales growth, the Golden Arches is now in decline once again.

The king of burger growth

Restaurant Brands reported systemwide sales at Burger King grew 7.8% in the fourth quarter: It increased the number of open restaurants almost 5%, but comps also expanded 2.3% for the period. In contrast, McDonald's said companywide sales were down 5% over the same time, but tumbled 8% in the U.S. Even Wendy's (NASDAQ: WEN), which has also experienced softening comp trends, still posted a gain of nearly 1% for the fourth quarter:

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Data source: Company quarterly SEC filings. Chart by author.

It now appears that McDonald's is returning to its old ways. Not only has it seen comps fall for two straight quarters after enjoying five consecutive periods of growth, and notched its fourth straight year of lower customer counts, but it's now going back to its past of throwing a bunch of ideas at the whiteboard and hoping one of them sticks.

Among the plans McDonald's has announced since the end of the quarter are:

  • $1 sodas, any size, beginning in April
  • $2 McCafe specialty drinks
  • Curbside service
  • Mobile ordering and payment expansion
  • Expanded kiosk ordering
  • Home delivery

Back to basics

These aren't necessarily new ideas for McDonald's or its rivals -- Burger King has toyed with home delivery for several years; Wendy's is vastly expanding the number of ordering kiosks in its restaurants; and everyone seems to have a mobile-ordering app these days -- but the embrace those ideas are receiving from the biggest burger joint does show how desperate it is to reverse the loss of customers, and what the limits are to its all-day breakfast campaign.

CEO Steve Easterbrook maintains his commitment to changing how the world views McDonald's, telling analysts on the company's earnings conference call that the chain is on its way to being "recognized by customers as the modern, progressive burger company." Yet the initiatives the burger joint is launching now are a repudiation of the concept of McDonald's as an elevated fast-casual burger chain, and recognition that it is price, not ambience, that brings customers to the window.

The core driver for McDonald's customers has always been fast, cheap, and accessible food, but Easterbrook's progressive reboot has only served to distract the chain from that imperative. The recent gains McDonald's enjoyed were made despite the attempts at imbuing an artisanal, signature style to its menu. It was, after all, the breakfast menu that helped lift sales once it was made available all day, and biscuits, McMuffins, and pancakes are about as far away as could be from the fast-casual aspirations the company held.

Image source: McDonald's.

The real future of fast food

That McDonald's is once again embracing discount pricing as a means of attracting customers indicates it is at least partially abandoning its vision of the "McDonald's of the Future." Certainly the technological flourishes are a sign it hasn't completely given up those grandiose visions, but as labor costs continue to rise and demands for even higher minimum wages are made, we'll see those advances introduced at an accelerated pace all across the industry, ultimately eliminating many jobs.

Last month it was reported Wendy's was installing self-ordering kiosks at 1,000 restaurants. With a location getting three systems at a cost of $15,000, it doesn't take much to see the benefit of reducing labor costs.

Paying attention to value

Investors come away with a very different impression at Burger King, which Nation's Restaurant News says has grown average unit volumes from $1.1 million to $1.3 million since 2010. CEO Schwartz says that's the result of a "consistent" message between the company's marketing and its menu, which it has tried to balance between value offerings and premium ones.

Easterbrook virtually ignored the value end of his menu and sales suffered, something which to his credit he's acknowledged, saying McDonald's would be focusing on it in the future. No doubt the initiatives above are a byproduct of that.

The encouraging thing is that since McDonald's is looking down-menu again, it will rediscover what made its chain great to so many people in the first place. Although its stock is trading at all-time highs despite a stumbling performance, McDonald's shares can go higher still as customers come back to get a tasty meal at a good price.

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Rich Duprey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.