Fast-Food Joints Are Betting on This 1 Thing to Save Them

Under attack from all sides, quick-serve restaurants like McDonald's and Burger King hope to have this ride to their rescue

Mar 24, 2014 at 6:00PM

Fast-food restaurants have a problem. Just as Benjamin Franklin disparaged New Jersey for being "a keg tapped at both ends" between New York and Philadelphia, fast food is being bled dry of sales by fast-casual dining chains on one hand and convenience stores on the other.


The foodservice industry is still reeling from the effects of the recession, with the market researchers at NPD Group finding the fast-casual segment the only dining category enjoying any growth, recording 8% growth in 2013 compared to 2% for the whole industry.

Fast-food chains in particular are suffering from losing diners who enjoy the balance of price, quality, and ambience they get at fast-casual restaurants like Chipotle Mexican Grill (NYSE:CMG) and Panera Bread (NASDAQ:PNRA), while also trading down to convenience stores like 7-Eleven and Wawa that are adding more fresh food options and, well, convenience. Analysts at Technomic say 34% of consumers say they would have visited a restaurant had they not purchased a prepared food from a C-store on their most recent visit.

The fallout has been predictable. McDonald's (NYSE:MCD) witnessed its fourth consecutive drop in comparable-store sales in February while they barely budged 0.2% higher for Burger King Worldwide (NYSE:BKW). Just last week hot sub shop Quiznos filed for bankruptcy, which followed on the heels of pizza joint Sbarro doing the same thing. In contrast, Chiptole's fourth-quarter earnings surged 30% over last year as the burrito chain said increased traffic juiced sales and Panera similarly said its fourth-quarter profits rose more than 5% on higher same-store sales, even though it rang up fewer transactions.


Source: Starbucks.

To stem the losses, fast-food chains are turning to technology, namely mobile ordering and payment apps, though it's doubtful it will help. Whereas Starbucks (NASDAQ:SBUX) is a recognized leader in this field with its popularly sleek mobile app that will now allow tipping too, others are quickly following suit. Burger King, for example, just said it would begin accepting payments and offering discounts through mobile devices at more than 7,000 U.S. restaurants, while Yum! Brands' Taco Bell unit will be adding mobile ordering capabilities later this year. Others including McDonald's, Chick-fil-A, and Wendy's have announced similar plans as well. 

Because restaurants like Chipotle, Panera, and Starbucks have had mobile apps for years, I'm doubtful that fast-food joints suddenly adopting the technology will meaningfully improve their chances for success. They were late to embrace it, and while improving customers' ability to order and pay as well as being able to tie them into loyalty programs could help, fast food has more problems than that.

Fast-food chains need to improve their higher-end menu items to better compete with fast-casual chains, but that will likely mean higher prices. Price-sensitive customers are already leaking to the convenience stores, and it may become a torrent if the fast-food restaurants have to raise prices.

More than a double-tapped keg, fast-food chains are caught between a rock and a hard place, and blindly grasping at technology to extricate themselves from their predicament. It's not an enviable place to be in and not a sector investors should willingly place their money in.

The technology play that will change everything
Want to get in on the smartphone phenomenon? Truth be told, one company sits at the crossroads of smartphone technology as we know it. It's not your typical household name, either. In fact, you've probably never even heard of it! But it stands to reap massive profits NO MATTER WHO ultimately wins the smartphone war. To find out what it is, click here to access the "One Stock You Must Buy Before the iPhone-Android War Escalates Any Further..."

Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide, Chipotle Mexican Grill, McDonald's, Panera Bread, and Starbucks. The Motley Fool owns shares of Chipotle Mexican Grill, McDonald's, Panera Bread, 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

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information

Compare Brokers