By
Selena Maranjian
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More Articles
January 29, 2007
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If you think that McDonald's (NYSE: MCD ) is the king of the fast-food world, you're right. It raked in $21.6 billion in 2006, up from $20.5 billion in 2005. Compare that with Burger King's (NYSE: BKC ) $2 billion in fiscal 2006 and Wendy's (NYSE: WEN ) $3.8 billion. That's 5.4% growth for McDonald's, 5.6% for Burger King, and 4.1% for Wendy's. McDonald's has close to 14,000 locations in the U.S. alone -- roughly twice as many as its two key competitors.
Investors interested in particular industries would do well to check out the trade publications that serve those industries, as they can be quite informative. In QSR, the trade magazine serving the "quick-serve restaurant" industry, for example, I learned that McDonald's generates roughly $2 million in annual sales per unit, which is close to twice as much as Burger King and Wendy's units generate. Wow!
All these numbers are telling. We might assume that given McDonald's size, it can't grow too quickly. Well, it's growing sales just about as fast or faster than its key competitors. It's also generating much more in sales at each location than those peers.
Which fast-food chains are increasing their sales most quickly? Well, privately held Cold Stone Creamery's growth rate topped 40%, according to a November issue of QSR, while Buffalo Wild Wings (Nasdaq: BWLD ) grew by 23% between its last two fiscal years. (The latter is a Hidden Gems recommendation that has more than doubled since Tom Gardner first recommended it. You can read more about it in this Ryan Fuhrmann article.)
Other factors to consider when evaluating fast-food chains include:
- How many meals are covered. McDonald's, for example, does good business at breakfast time, whereas Yum! Brands' (NYSE: YUM ) Taco Bell ... well, not so much.
- How many of the company's units are franchised vs. company-owned. This can reflect how easily the company can control its business. Its real-estate situation is also relevant, as some companies own many of their locations, while others lease them. Owned properties can be valuable assets. McDonald's actually gets much of its income in the form of royalties from franchisees.
- Note also that many, if not most, fast-food chains have now reported (or will soon report) their end-of-year numbers, which you can look up and evaluate. Interestingly, they're often a good bit lower than the "systemwide sales" numbers you may find in trade publications. That's because many chains support franchises which generate dollars that are included in systemwide sales but which don't all get sent to the parent company.
- Food trends. If Mexican food is rising in popularity, that bodes well for some chains more than others. If a non-Mexican chain is innovative, though, it can still benefit from the trend. (Think, for example, of the McDonald's breakfast burrito.)
So look at the big picture whenever you can -- it can inform your view of a company's bottom line.
For more on the quick-serve restaurants mentioned, check out:
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Longtime Fool contributor Selena Maranjian owns shares of McDonald's and Yum! Brands. The Fool's disclosure policy is enamored of the McGriddle.
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