McDonald’s Takes an "If You Can’t Beat 'em, Join 'em" Strategy

McDonald’s latest test move may be just what the doctor ordered.

Mar 13, 2014 at 2:36PM

McDonald's (NYSE:MCD) seems to be getting attacked from every direction lately. Burger King Worldwide (NYSE:BKW) is going after its Big Mac. Taco Bell of Yum! Brands is eyeing Mickey D's morning crowd. Coffee and pastry players such as Starbucks (NASDAQ:SBUX) and Dunkin' Brands Group (NASDAQ:DNKN) have been aiming for bigger bites of McDonald's breakfast business at an increasing pace. McDonald's has begun test marketing an interesting strategy designed to help it fight back.


Hot sandwiches are hot
It used to be that the coffee-and-pastry chains were the places to get, you know, coffee and a pastry. If you wanted a hot sandwich, you would go on over to McDonald's. That has changed.

Dunkin' Donuts has recently been growing like a weed. Last quarter its revenue jumped 13.3%, same-store sales hopped 3.5%, and diluted earnings per share soared 26.5%. You might not believe it, but according to Dunkin' Donuts CEO Nigel Travis the main reason for the increase was not coffee or donuts, it was actually hot breakfast sandwiches.

Dunkin Donuts isn't done either. President John Costello sees "opportunities to continue to expand the breakfast platform." With McDonald's still holding 30% market share of this morning meal, who can blame Dunkin' Donuts?

Meanwhile, Starbucks sees opportunity too and it has begun to add hot sandwiches to its pastry lineup. The lines at many locations are already long in the mornings so why not try to sell these guests some food and keep them from stopping again at McDonald's?

On Starbucks' most recent conference call, CEO Howard Schultz threw out a teaser. He stated, "I'll tell you we've got some great new innovations coming both in that morning category around the savory items and warm items." Poor McDonald's. Everybody wants a piece of its pie.

McDonald's fights back
Rather than just trying to come up with new innovative hot sandwiches in response to Dunkin' Donuts and Starbucks, McDonald's has taken another approach. It is going after their pastry businesses.

Free Petite Pastries Mcdonalds


McDonald's has begun test marketing "raspberry and cinnamon cream-cheese Petite Pastries" in certain locations. It was also reported that guests at some locations have seen "croissants and vanilla scones" tested. Blueberry Muffins and sugar doughnuts have been spotted at McDonald's locations in the U.K. Oops. This could prove to be a serious threat to the traditional pastry business that Dunkin' Donuts and Starbucks probably didn't see coming as a threat from McDonald's.

Take this, Burger King!
Burger King has been picking apart McDonald's for months. First it launched Satisfries, a 40% lower fat and 30% fewer-calorie version of "the leading French fries." That's code for McDonald's.

Burger King went after several more McDonald's items; the Big Mac with the Big King, the McRib with its own $1 rib sandwich, and McDonald's spicy chicken sandwich with its own version. The Whopper chain is reimaging its restaurants to make them look remarkably similar to McDonald's reimages while it offers exotic coffee combinations that are similar to coffee from McCafe.

Mcdonalds Bacon Clubhouse Burger

Source: Business Insider

Now McDonald's is launching a new hearty burger called the Bacon Clubhouse burger. McDonald's describes it as:

Thick-cut Applewood smoked bacon, caramelized grilled onions, white Cheddar, crisp leaf lettuce and fresh tomato, all lovingly layered on a quarter pound of 100 percent pure beef, then topped with Big Mac special sauce. Served on an artisan roll.

Could this become the new king of all burgers? If it tastes as good as it sounds, it could very well be. Nice shot back at Burger King, McDonald's.

Foolish final thoughts
McDonald's growth has been anemic lately, but this could be a sign that it's getting its act together again. The pastry move could prove to be lucrative as it provides customers a "grab and go" opportunity with minimal kitchen interruption, something that has been caused by previous menu introductions. The new burger as well seems to contain many of the same ingredients that McDonald's already uses in the kitchen. It's about time McDonald's started fighting again with simplicity rather than steering away from its core with things such as the failed wing attempt. Time will tell if McDonald's has got its groove back or not.

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Nickey Friedman has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide, McDonald's, and Starbucks. The Motley Fool owns shares of McDonald's and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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