McDonald's (NYSE: MCD) food may not win any haute cuisine awards, but its stock is actually the better investment than any of its better-burger shop rivals. Fast-casual chains may try to win the moral high ground by emphasizing that their fresher ingredients are more wholesome, but there's also something to be said for giving customers unpretentious, tasty food at a good price.
Continue Reading Below
In fact, the fast-casual restaurant trend may have run its course. Although the niche is still growing and remains the leading restaurant segment -- with sales expected to expand by 10% this year -- that's more a function of the chains continuing to open new locations, charging higher prices, and customers choosing more favorable product mixes. Traffic is falling, and though McDonald's also struggles with bringing in more customers, here are four reasons why it's still the better bet.
Let's get this one out of the way first. A basic ShackBurger at Shake Shack (NYSE: SHAK) will cost you $5.55 while an Original Charburger at The Habit (NASDAQ: HABT) will run you $7.65, though you can get an apparently unoriginal Charburger for $3.50. Grilled chicken sandwiches will run you over $6 at both locations.
In contrast, you can get a basic burger at McDonald's for around a buck, and for less than $6, you can get a Big Mac meal that will include fries and a drink. Same with a grilled chicken sandwich.
Sure, a ShackBurger and a McDonald's hamburger aren't quite the same thing, but on sourcing and sustainability, the fast-food joint can pretty much stand toe to toe with so-called better-burger restaurants. McDonald's has committed to sourcing almost all of its meat responsibly and to have them raised in a humane manner.
Continue Reading Below
Certainly, the types of people who will visit a Habit restaurant will largely differ from those who go to a McDonald's, but McDonald's ability to give a good, tasty meal at an affordable price gives it a leg up on the competition.
As noted before, better-burger chains are still in their expansion phase, with each restaurant planning to open dozens more locations this year and in the years to come, even though individual restaurant metrics are falling. They might not be unprofitable, but declining average unit sales as more locations are open don't necessarily argue in favor of continuing to open more.
Shake Shack's average weekly sales volume fell last quarter from $102,000 last year to $92,000 this year, but management still thinks sales volumes from new units will rise. It projects $3.4 million in annual sales from new restaurants compared with $3.3 million last quarter. And after peaking in 2015 following several years of strong growth, The Habit's average unit volumes began to turn down last year.
McDonald's is also opening new restaurants, expecting to open 900 locations this year, but more than half of them won't require that the company fund any capital expenditures for them. With over 37,000 restaurants in its system -- more than 14,000 in the U.S. alone -- it's not feeling pressure to expand to satisfy any private equity backers.
Smashburger, which was founded by private equity, has hundreds of locations already, is opening dozens more each year, and has expanded into casino locations to keep the growth going. But it's had four CEOs in the last four years, the last quitting after less than a year on the job. Both Fatburger and Bobby's Burger Palace are planning irregular IPOs as a means of financing their growth plans.
3. Intense competition
It's true that the burger wars between McDonald's, Burger King, and Wendy's have intensified over the last few years, with each trying to outdo the other to gain the upper hand, but the better-burger space continues to see new entrants into the market, saturating it with the same concept.
Beyond Shake Shack, The Habit, Smashburger, Fatburger, and Bobby's Burger Palace, there's also In-N-Out Burger, Five Guys, Umami Burger, Elevation Burger, BurgerFi, Jake's Wayback Burger, and more. And all of them have aggressive expansion plans. There's really only so many ways to prepare a burger uniquely and this explosion of new burger shops is likely contributing to falling same-store sales.
Shake Shack's comps have turned negative while The Habit has gone from double-digit growth to barely perceptible increases of 0.1%. If other chains go public, we'll undoubtedly see their numbers plunging, too.
4. High cost of breaking out
And all of those chains end up making it difficult for any one to stand out. Although they're expanding nationally, a few dozen stores (or even a few hundred) make making a big impact expensive for better-burger chains wanting to rise above the rest.
McDonald's has the benefit of scale, not just in domestic markets but globally if necessary. But its decision to offer all-day breakfast two years ago, while costly in upgrading the necessary equipment to accommodate the change, was relatively easy to achieve because of its marketing heft. It was able to roll out all-day breakfast with a massive marketing campaign that literally caused a U-turn in a three-year sales slide.
Cheap and simple win the day
McDonald's has weaknesses of its own, to be sure, but now that it has mostly stopped pursuing the millennial consumer and focuses instead on its core customer who appreciates good food at a good value, it is easily the better investment bet over the so-called better-burger restaurants.
10 stocks we like better than McDonald's
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and McDonald's wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of August 1, 2017