Can Fast Food Take on Fast Casual?

McDonald's (NYSE: MCD  ) Mighty Wings are officially out. Not surprisingly, the wing's release coincided with the NFL season kickoff. Considering wings account for 39% of Buffalo Wild Wings' (NASDAQ: BWLD  ) sales, and football season is its biggest time of year, some investors worry that B-Wild's revenue could take a hit from the new competition.

A similar situation sparked investor panic once before. Last year Yum!'s Taco Bell (NYSE: YUM  ) launched a new menu called "Cantina Bell" to better compete with Chipotle Mexican Grill (NYSE: CMG  ) . Investor fear from this menu-launch sent Chipotle's shares south -- plummeting over 40%. But Buffalo investors should relax, McDonald's Mighty Wings pose no significant business threat.

Taco Bell vs Chipotle
To illustrate the "competition" between McDonald's and Buffalo Wild Wings, we turn to Taco Bell and Chipotle Mexican Grill. Chipotle's management never feared the Cantina Bell menu because it recognized the two companies' customer bases are very different. It was confident that its customers would continue to come, and that's exactly what happened. Cantina Bell was launched in July 2012. The chart below shows that while Chipotle's stock price has been a roller coaster, revenue and net income have steadily climbed even with new competition, despite warnings from famous hedge fund manager David Einhorn.

CMG Revenue TTM Chart

CMG Revenue TTM data by YCharts

Revenue and earnings growth is primarily driven by new restaurant openings. But in the third quarter of 2012 -- the first quarter with competition from Cantina Bell -- comparable sales were unscathed, rising 4.8%. The stock dropped on fear, not financial metrics. As investors began to see that the threat of Taco Bell eating into Chipotle's profits was unrealistic, the stock steadily recovered.

So, is Taco Bell's Cantina Bell menu completely irrelevant? No way. It may not be a Chipotle-killer, but it's one of the reasons Taco Bell has grown same-store sales for six consecutive quarters. Other factors include Doritos Locos Tacos and an upcoming breakfast launch. These initiatives are boosting Taco Bell's numbers -- a big deal for Yum! since Taco Bell currently accounts for 60% of Yum!'s US operating profit.

As for Chipotle, I'm thinking investors will think twice before doubting this story again. Last quarter revenue was up 18% year over year, earnings per share were up 10%, and comp-sales were up 5.5%. It also expects to open around 180 locations this year. These aren't signs of a company folding from fast food competition. 

McDonald's vs Buffalo Wild Wings
Returning to Buffalo Wild Wings, there is no realistic chance of Mighty Wings stealing away customers. The two companies have very different customer bases. Consider that the majority of B-Wilds' customers go for more than just the wings. They go for the big-screens, the environment, and beer -- things that McDonald's can't offer them. 

However, I do believe the publicity these wings are getting will help boost McDonald's comp-sales next quarter -- something this company desperately needs. First quarter this year, comp-sales were down 1.2%. Last quarter comp-sales were up just 1%. McDonald's is hoping for a bigger boost than that, and by offering chicken wings during football season it has a decent chance. 

As we've seen, fast food restaurants are taking plays from fast casual's book. Yet these moves aren't effecting fast casual results; they are boosting fast-food comp-sales.

Wendy's vs all other burger joints?
Burger chain Wendy's (NASDAQ: WEN  ) decided to emulate fast casual as well when it revamped its menu in 2009. New fast-casual burger chains like Five Guys and Smashburger are offering more artisan menu items, and the public is crazy for them. 

Wendy's Senior VP Denny Lynch says, "I promise you three, four, five years ago, we couldn't pronounce 'asiago,' we certainly wouldn't have known it was a smoked cheese that tastes great with chicken." This is a humble admission of a need to learn and grow as a company to be competitive. In addition to asiago cheese, the chain now offers things like five-grain flatbread, smokey honey mustard, and even a pretzel bun.

Wendy's revamped menu hasn't hindered fast casual burger chains' growth in the least -- For example, Smashburger was founded in 2007, and has since grown to over 200 locations. But this new menu has allowed Wendy's to surpass Burger King in sales in 2012 and become the #2 American burger chain behind McDonald's. 

Conclusion
Fast casual continues to be the hottest segment in the restaurant sector. I don't think investors should be betting against any fast-casual chain right now. Places like Chipotle and Buffalo Wild Wings are clearly scratching an itch consumers have. 

When fast food imitates fast casual, fast casual isn't affected at all. But this move does make a fast food chain more competitive against other fast food chains. Wendy's and Taco Bell are doing a good job at this and continue reaping the benefits. 

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  • Report this Comment On September 13, 2013, at 2:30 PM, somethingnew wrote:

    I will definitely being trying out the Mighty Wings and I agree they won't effect Bwld's core customers. These are people that go there and pay a premium for mediocre, over-priced wings and the sports environment. Every time I've gone there (which is only when friends have dragged me there) I feel ripped off. But then again, that's why I have shares in Bwld and not McDee's. If you have an ok product combined with a superior experience, you can fool people into going there and paying for over priced food. McDee's has mediocre products as well but I know what I'm paying for, I'm just not paying extra for the experience like I would at Buffalo Wild. It's the same for getting my haircut. I'm not going to go to Sportclips so I can watch sports which don't interest me when I can pay less at Fantastic Sam's because I'm not paying for the tv screens everywhere.

  • Report this Comment On September 15, 2013, at 9:20 AM, betrube wrote:

    I agree that Chipotle will not fold or slow down due to Fast Food Chains. Fast Food Chains just have bad stigma vs the Casual Crowd. I only go to fast food chains for the kids sometimes. But, any thoughts to the idea that small time operators can copy the Chipotle concept at $2.00 cheaper with the same quality. I have seen in at a couple of locations in New York and Philly. Yes, my kids love Chipotle, but I think they are starting to look for more variety in their meals also. I would short this stock but with all their new locations on tap, not sure its the right time.

  • Report this Comment On September 16, 2013, at 12:22 PM, thequast wrote:

    @somethingnew: thanks, I enjoyed this comment. Yeah, I hope to give these wings a try too.

    @betrube: this comment is off the top of my head, but Chipotle with over 1500 locations has buying power that a small time operator won't have. non-hormone meat production can get expensive on a small scale. That said, Chipotle also has a decent profit margin, so it seems a small time operator could undercut Chipotle's prices, but then have a razor profit margin. But it's hard to sustain a small business with a razor margin long-term...just my thoughts. Definitely wouldn't short though, 100s more locations already in the pipeline.

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