Lately, things have not been going that well for McDonald's (MCD 0.38%) (MCD 0.38%)The competition for customers in the U.S. has gotten quite intense, as rivals have sought to steal business away from the fast-food giant. The most direct attacks have come from Taco Bell, part of Yum! Brands (YUM 0.03%), and Burger King Worldwide (BKW.DL). As a result, McDonald's comparable sales were flat in April, and the company said "industry dynamics remain challenging."
Can a new menu item like seasoned French fries help turn things around for McDonald's?
Source: foodbeast.com
What are seasoned fries?
McDonald's started testing new seasoned French fries on May 9 in Northern California and St. Louis. The fries come in three flavors -- garlic Parmesan, spicy Buffalo, and zesty ranch. Customers add the flavors with the fries in a bag and shake them together. McDonald's has already found some success with this system and has been selling "Shake Shake" fries in China, India, and Australia since 2005.
Source: McDonald's India
Burger King has already tried seasoned fries in the U.S.
While "Shake Shake" fries have worked for McDonald's abroad, they didn't work out for Burger King. Back in 2002, Burger King introduced "Shake 'em Up" fries. The fries came with a powdered flavor and a bag to mix them up in. One flavor that was offered was cheese, which was supposed to win over children with cheesy French fries. Unfortunately for Burger King, the fries did not last even a year and are still considered one of the biggest menu flops of all time.
Source: courant.com
Why they might work for McDonald's
I think seasoned fries have a good chance of success because McDonald's fries are tough to beat and the added flavors make sense. McDonald's is sticking to flavors that I think consumers will like. According to Businessweek, the reviews have been positive on social media, and that's a good sign.
I also like the fact that McDonald's won't have to retool its kitchens for seasoned fries. According to a BusinessInsider report, many franchisees are unhappy with how complex the menu has become, and that has lead to a slowdown in service. McDonald's success has been built on simplicity, and I think seasoned fries follow that tradition.
Meanwhile, over at Taco Bell and Burger King...
Both Taco Bell and Burger King have been taking direct aim at McDonald's and are looking to steal away business. Taco Bell launched a new breakfast menu and even used customers named Ronald McDonald in its national advertising campaign. Besides breakfast, Taco Bell launched a new flavor of its Doritos Locos Tacos called Spicy Chicken Cool Ranch Doritos Locos Tacos. The new taco features spicy shredded chicken inside a Cool Ranch Doritos taco shell. Taco Bell could certainly use the boost in sales. In the first quarter, Taco Bell's U.S comparable sales declined 1%.
Source: Taco Bell
Burger King has been active adding plenty of new menu items. While McDonald's has the Big Mac, Burger King now has the Big King. Instead of "Shake 'em Up" fries, Burger King now has Satisfries. Burger King advertises Satisfries as having 40% less fat and 30% fewer calories than McDonald's French fries. To appeal to health-minded parents, Burger King has made Satisfries the standard French fries for its kid's meals. Burger King could use the boost as well since U.S. comparable sales rose only 0.1% in the first quarter.
How do shares compare?
|
Market Cap |
Forward P/E |
EV/EBITDA |
1 Year Return |
Dividend Yield | |
|---|---|---|---|---|---|
|
McDonald's |
$102.03 B |
16.46 |
11.15 |
2.47% |
3.1% |
|
Yum! Brands |
$33.86 B |
18.12 |
12.56 |
10.46% |
1.9% |
|
Burger King |
$9.02 B |
23.38 |
16.70 |
34.35% |
1.1% |
Source: Yahoo! Finance
Foolish final thoughts
While seasoned fries are only in the test phase, I think they could have potential for McDonald's. They also won't require many changes for franchisees, and that should make them happy. If McDonald's can simplify its menu and speed up service, I think that will go a long way in helping grow comparable store sales.
In terms of McDonald's shares, they're in deep value territory and represent a great bargain for investors. The company that pioneered the value menu is now a value itself. Shares are trading at 16 times next year's earnings and have a dividend yield of 3.1%. For long-term investors, it's hard to go wrong owning shares of McDonald's.
