The fast-food industry has had a rough few years. The market as a whole has had to deal with consumers diverting their dollars to fast-casual concepts, which have pressured traditional chains like McDonald's (NYSE: MCD) and Burger King by offering better-tasting, better-for-you versions of familiar fare at higher prices.
In addition, the fast food industry has had to deal with its own stumbles. McDonald's and Domino's (NYSE: DPZ) have become technology leaders, but for a while (longer in the case of the burger chain) they lagged behind Starbucks.
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Now, while the competition has arguably gotten even more intense, things are looking up for dining out in general. From 2015 to 2016 Americans spent more money at bars and restaurants ($54.857 billion) than they did on groceries ($52.503 billion). That's a first, and it's good news for fast food -- but not all chains will benefit.
Some, like Yum! Brands, may succeed, but their fortunes remain in doubt (largely due to questions at Pizza Hut). Two fast food leaders, however -- McDonald's and Domino's -- have shown that they understand the changing market. Both have also shown that they can embrace technology and serve a customer base that clearly prizes convenience over quality.
McDonald's has turned a corner
The company that brings you the Big Mac, Chicken McNuggets, and the McRib (at least occasionally in limited markets) has not always been a sure thing. It struggled mightily, both in dealing with fast-casual rivals and in figuring out its mix of discounting.
In recent quarters, though, McDonald's has figured things out. In a lot of ways, the fast-food chain has gone back to basics. Instead of chasing people who don't eat at its restaurants by offering salads and other healthy fare, the company renewed its focus on its core customer.
That has not meant that the company has not upgraded its food. McDonald's has made sensible improvements to its product line, including using fresh beef on a limited basis. It has done that, however, as almost a sideline to its real mission of putting the focus back on tasty, quick fast food, served up in the most convenient ways possible.
Instead of adding gimmicky burgers or courting customers unlikely to be interested, McDonald's has focused on using technology to enhance the customer experience. This has included building out an app that offers mobile order and pay for curbside pickup and starting the process of adding ordering kiosks to all its stores. The chain has also been rolling out delivery in more markets, including the U.S., and the early returns have been strong.
"Over the course of the past nine months, we've introduced delivery in over 5,000 restaurants across 20 countries," CEO Steve Easterbrook said during the chain's Q3 earnings call. "Along with the 3,500 restaurants in existing delivery markets across Asia and the Middle East, we now offer delivery in over 20% of McDonald's restaurants around the world."
Easterbrook then expected McDonald's to offer delivery in 10,000 locations by the end of 2017. The CEO said this roll-out is incredibly important, because 75% of the population in the company's top markets lives within three miles of a McDonald's.
"In many of our markets around the world, we're seeing average check sizes between 1.5 and 2 times higher than our overall restaurant averages," he said.
It's basically the Domino's model
Domino's does not make very good pizza. There may be isolated markets where it offers a better pie than a local place, but it's fair to say that nearly every town or city has a shop selling a pizza that's superior to Domino's.
What Domino's does offer is convenience. The chain has made it absurdly easy to place an order, and that clearly appeals to a large customer base. The company's app allows for repeatedly placing the same order, and consumers can also use social media and even text message to order their food. Add in the fact that the company has spent decades building out a delivery system and Domino's has a clear lead when it comes to ease-of-getting-your-food.
That, on the surface, does not seem like enough to fend off the competition, but it clearly has, even as high-quality fast-casual pizza becomes more prevalent. In Q3 2017 Domino's domestic same-store sales grew by 8.4% versus the same period a year ago. That marked the chain's 26th consecutive quarter of improved comp sales in its home market.
In addition, comparable-store sales rose by 5.1% internationally during Q3. That's a near unfathomable 95th consecutive quarter of positive international same-store sales growth.
Domino's has also been able to deliver that growth while rapidly expanding. The chain opened 217 stores in Q3, comprising 53 net new domestic stores and 164 net new stores internationally. It has added 1,182 net new stores over the trailing four quarters, which is typical of its growth over the last few years.
Consumers want convenience
Both McDonald's and Domino's have focused on process over food. It's not that they offer bad products. It's just that they have focused their innovation on areas other than improving their menus.
The two chains offer familiar fare that people like, and they make it very easy to get and pay for. That's a model that has proven to work, and it comes with certain first-mover advantages. Once a customer has the McDonald's or Domino's app configured, he or she may not bother putting in the effort to set up an app for a rival chain.
These two companies have taken the work out of getting a meal. That clearly has value to fast food customers, and it should drive both chains for years to come.
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