Here's Some More Bad News for McDonald's and Yum! Brands

The most recent fast-food survey by Consumer Reports has some news for McDonald's and Yum! Brands... and it's not good.

Jul 9, 2014 at 6:00PM

Fast-food chains like McDonald's (NYSE:MCD) and Yum! Brands (NYSE:YUM) have had to deal with both increased competition from the fast-casual segment and changing consumer tastes lately. This has proved to be a troubling combination, and a recent report backs up the bad news. 

Which chains do consumers love? Not McDonald's or Yum! Brands
In a recently released fast-food survey by Consumer Reports, reported in Nation's Restaurant News, over 30,000 respondents were asked to rank their favorite fast-food chains on a scale of one to 100. Unfortunately, McDonald's, along with Yum!'s Taco Bell and KFC, rounded out the bottom of their respective categories. KFC, which is typically associated with cheap meals, even ranked at the bottom in customers' minds when it came to "bang for your buck." The bottom line is clear: Customers aren't happy with their experience at some of fast food's most established restaurants. This sentiment with U.S. customers isn't really surprising; Yum!'s most recent quarter showed a 1% dip in U.S. comparable-store sales and McDonald's declined 1.7%. With that said, Yum! is still on track for a 20% annual EPS jump thanks to a rebound in China, and overseas sales have helped keep McDonald's ship steady in recent years as well. 

With their international exposure, should these restaurant chains even worry about declining U.S. sentiment? Even if they do want to change their reputation in the U.S., what can they really do about it?


Source: McDonald's.

There are no obvious answers
Fast-casual restaurant traffic grew 8% last year; it's clear that chains like Chipotle are taking a bite out of fast-food's market share. Tod Marks, senior projects editor for Consumer Reports, stated that the survey results show that customers were focused on "quality, not just low price." So what should McDonald's and Yum! do about it? They're in the middle of vastly different approaches. 

Yum! has doubled down on its strategy. Over the past year the company has focused on weathering worries about food quality at KFC in China, and igniting its core base in the U.S. with new menu items (such as Doritos Tacos and breakfast items). Its strategy over the past 12 months has focused on taking market share away from other fast-food competitors, such as McDonald's breakfast menu, rather than from fast-casual chains. Meanwhile, McDonald's has attempted to offer healthier and fresher menu items like apple slices, fruit parfaits, and even premium coffee. It's clear that McDonald's is trying to offer products to fast-casual lovers, coffee shop lovers, and burger lovers, hoping to be all things to all people. 


Source: Taco Bell.

Stick with Yum!
With over 100 menu items, McDonald's seems to be almost too concerned with the fast-casual craze. When restaurants offer too many items, service and margins may suffer, but the bigger risk is a loss of identity. By offering a little of everything, McDonald's risks losing a connection with customers who've come to love it for a few things. 

Meanwhile, Yum! must have had an epiphany when it stopped marketing its Cantina Bell concept and pushed the Doritos Taco instead. Doing so reinvigorated its brand. There's simply no way that customers are going to associate Taco Bell or McDonald's with high-end food anytime soon, but enough people still love Taco Bell to make the Doritos Taco its best-selling menu item of all time. It fits Taco Bell's core customer profile. Yum! has its eye on KFC's Chinese business and Taco Bell's core customers; its focus is in the right place. 

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Adem Tahiri has no position in any stocks mentioned. The Motley Fool recommends McDonald's. 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.

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