Taco Bell should follow its own advice. Source: Taco Bell.
As you may have noticed, it appears Yum! Brands' (YUM 1.22%) Taco Bell is aggressively going after McDonald's (MCD -0.05%). First, it was rolling out a breakfast menu coupled with an aggressive ad campaign that outright taunts its burger antagonist. The taco purveyor followed that up by copying McDonald's legendary Dollar Menu.
On the surface, it makes sense to go after the leader in the quick-service restaurant industry, or QSR. If you can emulate the No. 1 fast-food restaurant, then growth will follow -- right?
Well, that isn't the case anymore. Taco Bell's strategy is foolish (note the lowercase "f"), and it's a sure path to a low-growth future.
McDonald's low growth
Although McDonald's is the No. 1 QSR, it's been on top for decades. What investors should be looking at is its current rate of growth, because over the past five years, it hasn't been pretty for McDonald's on a revenue basis. McDonald's has grew its top line an anemic 3.6% annually over the past five fiscal years, by growing from $23.5 billion in 2008 to $28.1 billion in 2013. Even worse, on a year-over-year basis, McDonald's grew revenue only 1.9% last fiscal year -- below the rate of inflation during that period as measured by the Consumer Price Index.
McDonald's appears to have gotten the memo. How to deal with this slowdown is a tougher issue, however. The company recently named a new president for U.S. operations to reverse its sluggish trend by naming Mike Andres to the position.
Investors should hope he keeps the position longer than the executive he's replacing. Jeff Stratton retired after a short two-year stint, taking over from Jan Fields after the company reported its first sales drops in over a decade..
McDonald's has many things going for it -- including a large, sustainable dividend and its top-dog advantage -- and we're fans of the company here at The Motley Fool. However, growth isn't among its advantages over the past five years.
Chipotle sums up McDonald's struggles
Chipotle Mexican Grill co-CEO Monty Moran sums up McDonald's struggles:
The predominant goal [for traditional fast-food chains] is the cheapening of the raw ingredients, the automation of the work such that anyone could do it ... so that they turn over their employees without any care for them, where it's a game of value meals and cheapening the food experience. ... That is traditional fast food, and we think that's going away. We, and others like us, will replace that.
And while on the surface we could assign this viewpoint to one confident executive and a food snob, there are other signs that appear to prove him correct. A recent Wall Street Journal article, for one, analyzes data from restaurant consultant firm Technomic and comes to the same conclusion.
According to the study, the percentage of those age 19 to 21 in the U.S. who visited McDonald's monthly has fallen by 12.9 percentage points since 2011.. And they're defecting to fast-casual places with an eye on quality, such as Chipotle, Five Guys, and Panera Bread.
Emulating McDonald's -- how's that working out for you so far?
While it's still too early to comment on the success of copying the McDonald's Dollar Menu, it's noteworthy to know that McDonald's has moved on from the concept by introducing its "Dollar and More" menu. The Dollar Menu had historically been a source of contention between franchisees and the company.
The problem with such a transparent pricing value statement is that input prices change, resulting in, at best, a "loss leader" product -- a product that a franchisee loses money on just to get you in the door. Without a higher-margin purchase (read: fries and soda), the franchisee loses money on the transaction.
We do have more info on Taco Bell's breakfast strategy, and it doesn't appear to be good news. In the recently reported second fiscal quarter, the strategy doesn't appear to have increased company sales or total revenues, which were down 5% and 3%, respectively, from last year's quarter, which didn't have breakfast.
However, the company did specifically mention higher labor costs from its breakfast menu as a drag on restaurant profit for the quarter. So it appears right now that the strategy isn't a game changer as far as revenue and profits are concerned.
Final thoughts
Wayne Gretzky became the greatest hockey player ever by following his father's simple advice: "Skate to where the puck's going to be, not to where it has been." In a way, Taco Bell appears to be doing the exact opposite by following McDonald's. In the short run, it's entirely possible for Taco Bell to have a modicum of success with this strategy. But in the long run, it appears to be a flawed strategy.
