The End of Fast Food As We Know It

The advent of fast food was an amazing breakthrough for consumers in decades long gone by. People no longer had to spend the time to prepare meals every day. Like washing machines, dishwashers, microwaves, and other time-saving innovations, the ability to grab a quick burger and fries saved time and effort, and smoothed the growing transition as more people entered the modern workforce.

Of course, for many years the healthiness of fast-food fare -- and other consumer habits -- didn't bubble to the front of consumer thought. Once upon a time, not only did people gobble up Big Macs with abandon, but they also regularly smoked cigarettes in restaurants and everywhere else. Some may remember the little aluminum ashtrays on tables at fast food joints, and the lingering, socializing, and smoking that customers engaged in after their quick meal. Such behavior was later relegated to one section of each restaurant. Eventually, all restaurants became smoke-free as times -- including consumer demand and government regulations -- changed.

That's just an example of behavioral issues and industry evolution, and it ultimately didn't hurt its business as times changed. However, the traditional fast-food business is currently undergoing another huge health-related change, and it's a very serious disruption to the core business. The quality, healthiness, and appeal of food poses a threat to old-school fast-food companies' brands.

Investors need to shop very, very carefully.

Fast food's identity crisis
We can blame McDonald's (NYSE: MCD  ) recent weakness in stock price and business on all kinds of theories. Maybe it's tough comparisons to all those years when the fast-food giant was absolutely on fire. Maybe it's a difficult transition from now-retired turnaround pro, former CEO Jim Skinner, to his successor, Donald Thompson.

However, maybe a huge part of the problem is continuing momentum toward quick-service restaurants with more upscale images or brands. For just a little more money, consumers can get a quick meal that's a bit healthier or includes fresher, whole ingredients at restaurants such as Chipotle Mexican Grill (NYSE: CMG  ) , Panera Bread (NASDAQ: PNRA  ) , and Noodles & Co. (NASDAQ: NDLS  ) .

If the real problem is the latter, it's one of the most difficult things to tackle in consumer psychology. A brand perceived as inferior to others is very tough to reverse. It could also have very negative long-term effects. Classier reps may very well be winning the day, despite fast-food companies' best efforts to evolve.

McDonald's recently decided to discontinue its Angus Burger, which was meant to attract a different kind of burger consumer with an upscale, higher-quality option on the menu. It's a great idea in theory, but not enough people were willing to shell out more cash for the burger. Obviously, it didn't resonate with customers or fit with McDonald's brand.

Will people eat burgers fashioned of Angus beef? Sure they will. Obviously, though, McDonald's showed that some fast-food companies simply aren't the appetizing environment for that kind of "higher end" fare. It's also gotten rid of some of its salad selections, too.

Fast food companies won't give up trying to improve their brand images, though. Yum! Brands' (NYSE: YUM  ) KFC is trying to spiff up its image as we speak. It plans an experimental new concept, KFC Eleven. Rumor has it that this new "upscale" test store will give Colonel Sanders a pink slip, instead focusing on healthier variations on its fried chicken. According to a job description that's floating around the Internet, this experiment is part of a drive to "transform how people think about the brand," and will use menu items such as "flatbreads, sandwiches, salads, and soup bowls" in lieu of big buckets of Kentucky Fried.

Another Yum! Brands concept, Taco Bell, is ditching kid-centric meals because of their lack of traction at the chain. (Consumer advocates tend to frown on kids' offerings that include toy lures anyway.) Although this doesn't directly relate to upscaling the chain, it also may speak to the idea that Taco Bell is probably most popular with young adults who are less concerned about health and classiness and more concerned about beer money than higher-quality food money.

In cases like these, though, giving traditional fast-food brands a facelift is easier said than done. Consumers have a pretty hardwired perception already. It's hard to achieve a transformation.

Growth on the menu
That brings us to the upstarts like Chipotle, Panera, and recent IPO highflier Noodles & Co. All three have more upscale brands and atmospheres, and their fare comes quick and at reasonable prices.

Chipotle's recent quarter left former parent McDonald's in the dust, showing strength in the fast- or quick-service food area. Chipotle's recent quarterly same-store sales growth came in at an impressive 5.5%, while Mickey D's comps paled in comparison, with anemic 1% growth .

The "Food With Integrity" mission Chipotle has built into its mission helps shine up that brand; it uses natural, humanely raised, antibiotic-free, and GMO-free ingredients whenever it can. Many consumers would rather consume that kind of fast fare than that of more traditional, lower-scale rivals.

Noodles & Co. has gone public with much fanfare, much of it irrational, as is the case with many hot IPOs. Its skyrocketing price right out of the gate means it's trading at 79 times forward earnings at the moment. While it fits into the upper-scale quick-service segment -- and has the room for growth in a dining niche that investors find bullish -- that's a stock that needs to come back down to Earth.

Still, it's yet another new-school name gnawing at traditional fast food. It's known to be a better experience, and its menu includes healthier add-ins such as tofu instead of meat.

Companies such as Chipotle, Panera, and Noodles & Co. are eating traditional fast-food companies' lunches. They have filled an important niche: giving consumers reasonably priced and often healthier meals with a pleasant environment, yet without the time commitment of a full-service restaurant.

A cheap stock in quick food
From the investing standpoint, McDonald's and its traditional, old-school fast food ilk should be avoided. Something's going awry, and it may or may not be a permanent sea change. But it very well may be defection to these upper-scale quickie restaurants, and that's a trend that's sure to get even more pronounced and serious if the economy improves.

Noodles & Co. is still overheated with IPO euphoria. It's not a prudent buy at the moment, but it's an interesting stock for watch lists and further research. Chipotle is a strong company and a wonderful long-term holding, but since it's currently on the market's fast track, cautious investors may want to wait for a little temporary share weakness before buying in.

The good news is, it's a good time to look at Panera. That company recently received a share-price beat-down because of a slightly disappointing quarter, but it's still a strong company. And it's absolutely in the right place at the right time as traditional fast-food companies fight to keep up with such rivals, and even try the extremely difficult -- and possibly futile -- task of conducting brand facelifts.

So if you're looking for a reduced-price play on the end of fast food as we know it, take a look at Panera. It's looking the most tantalizing of these stocks right now.

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Read/Post Comments (4) | Recommend This Article (7)

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  • Report this Comment On July 27, 2013, at 12:35 PM, EastoftheRiver wrote:

    From the health angle: Noodles aren't that healthy. Huge carb monster burritos aren't either. How about some fresh baked bread? Bread will spike your insulin levels. You are probably better off getting two McDoubles from the drive through if you are starving. It's only a matter of time before these 'incredible' startups face the same scrutiny and scandals that McDonalds and it's longtime competitors have weathered for years.

  • Report this Comment On July 27, 2013, at 1:02 PM, sbirdy wrote:

    I don't eat fast food at all anymore. The places are run by careless teenagers who don't get paid enough to do their job with any kind of care. The food is unhealthy enough already; add to that the fact that it is no longer conscientiously prepared--and no thank you, I'll eat elsewhere.

  • Report this Comment On July 30, 2013, at 9:14 AM, mikecart1 wrote:

    Healthy and fast-food are not related. From McDonald's to Chipotle - they are all unhealthy compared to what you can fix yourself. The only difference is is that Chipotle is less unhealthy and more likely the food is stored in a cleaner environment. 850 calories for a basic 1 serving steak bowl that is loaded in fat isn't exactly the breakfast of champions lol.

    But neither is a Big Mac and fries...

  • Report this Comment On July 30, 2013, at 11:53 AM, Lateralus88 wrote:

    850 calories sounds like a lot, but if your suggested daily intake is 2000 calories, then a comparable dinner leaves 300 calories for breakfast and/or beverages.

    From my experience, if I have a Chipotle burrito for lunch, I'm taking it easy for dinner because I'm just not that hungry by the time dinner rolls around.

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4/17/2014 4:01 PM
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YUM $76.34 Down -0.52 -0.68%
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