Why McDonald's Is Switching to Fresh Beef

MarketsMotley Fool

Score another victory for the foodies.

McDonald's (NYSE: MCD) is embracing fresh beef, saying it will stop using frozen patties in its Quarter Pounders and other premium burgers in all of its U.S. restaurants by May.

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The move is the restaurant chain's latest effort under CEO Steve Easterbrook to meet its customer demands and improve its food quality after launching all-day breakfast, removing antibiotics from the chicken it serves, and testing out programs such as Create Your Taste, which included gourmet ingredients and table service, among other changes.

After launching a fresh beef test in select restaurants in 2016, McDonald's USA President Chris Kempczinski said of the nationwide rollout, "At the end of the day McDonald's is a burger company, and there's no more important place for us to focus on improving the quality of our food." McDonald's stock has soared with Easterbrook at the helm, and same-store sales have jumped at a time when much of the restaurant industry has struggled. Is fresh beef his latest trick to juice performance? Let's take a closer look.

All things to all customers

Over the years, McDonald's has evolved to suit a wide range of customer tastes. After starting out as a simple burger stand, serving french fries and milkshakes, the company has expanded into key categories such as chicken, with its trademark McNuggets; breakfast, which is arguably its most popular meal; and espresso beverages, with its McCafe line. For customers looking for healthier meals, McDonald's also offers options such as salads and wraps.

The desire to serve a more quality-conscious customer seems to be the biggest driver behind the fresh-beef initiative, since burger aficionados now have plenty of fast-food options, including Shake Shack (NYSE: SHAK), Habit Restaurants (NASDAQ: HABT), In-N-Out Burger, Five Guys, and others. Those chains may have peeled away some McDonald's customers.

Notably, however, the Golden Arches will continue to use frozen patties in its trademark Big Mac. Linda VanGosen, vice president of menu innovation, told Business Insider, "We have value customers and they're happy with where those products are." Still, Kempczinski left the door open for using fresh beef for the Big Mac in the future.

McDonald's offers value, convenience, and tasty food and draws in customers seeking one more of those qualities. Its new dollar menu is designed to cater to value-oriented customers, while the company hopes the new fresh-beef menu will satisfy consumers with pricier tastes.

Does fresh beat frozen?

While there's little doubt that fresh beef is better in quality than frozen, whether it will help performance is a harder question to answer. Looking at the performance of its peers might offer some clues.

Of the 50 largest fast-food U.S. restaurants by sales, 13 identify as burger chains with a mix of fresh and frozen beef. Here's a look at their performance by average unit sales.

Restaurant 2016 Average Unit Sales Fresh or Frozen? Number of U.S. Restaurants
Whataburger $2.706 million Fresh 806
McDonald's $2.555 million Frozen (historically) 14,155
Culver's $2.252 million Fresh 605
In-N-Out-Burger $1.975 million Fresh

319

Steak n Shake 1.9 million Fresh 568
Jack in the Box $1.53 million Frozen

2,255

Wendy's (NASDAQ: WEN) $1.45 million Fresh 6,537
White Castle $1.434 million Frozen 384
Burger King $1.361 milliion Frozen

7,161

Sonic (NASDAQ: SONC) $1.284 million Frozen 3,557
Carl's Jr./Hardee's $1.249 million Frozen 3,011
Checkers/Rally's $1.115 million Frozen 841
Five Guys $1.038 million Fresh 1,421

With the exception of McDonald's, the top five burger chains all serve fresh beef, and that list doesn't include smaller chains such as Shake Shack and Habit Burger, which both have strong average unit volumes. Likewise, the bottom five chains all serve frozen beef with the exception of Five Guys, which may have weak average unit volume because of its limited menu or its slower speed of service.

Correlation does not equal causation, as they say, and there are a number of factors that can drive higher average unit volumes, such as having a drive-through, a broader menu, and more marketing spending, but the numbers above do seem to favor the fresh-beef chains.

Considering that, McDonald's seems to be making a smart move by reaching out to a customer segment it's long ignored.

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Jeremy Bowman owns shares of Habit Restaurants and Shake Shack. The Motley Fool is short shares of Shake Shack. The Motley Fool has a disclosure policy.