McDonald's burgers might not be able to quite stack up to Shake Shack's higher-quality offerings, but it's value people are looking for at the Golden Arches. Image source: Shake Shack.
McDonald's (MCD -0.08%) buying Shake Shack (SHAK 1.62%) is just crazy talk. Although the fast-food chain's sales have been hurt by the rise of fast-casual burger chains like Shake Shack, Five Guys, and The Habit (HABT) -- and CEO Steve Easterbrook has said he wants McDonald's to be a "modern, progressive burger company" -- buying the trendy better burger shop just isn't going to happen.
Feeding frenzy
Shake Shack's stock got shaken up last week after a rumor suggesting McDonald's wanted to chow down on the company. The rumors were without any basis and the market quickly realized there was nothing to it. So after Shake Shack's stock jumped as much as 6% at one point, it ended up closing just 2% higher and hasn't moved much since.
McDonald's dramatic fall from grace and subsequent rebound has been extensively covered. After several years of quarter-over-quarter declines in same-store sales, the burger giant staged a fairly dramatic turnaround registering three consecutive quarters of comps growth. The introduction of its all-day breakfast menu has been largely responsible for the effort, though new chicken sandwiches, the use of real butter, and a bundled meal promo have at various times also been credited for the comeback.
No doubt they've all played a role, but Easterbrook's focus on returning the burger chain to health has been about improving the fast-food company's image. Although I've been critical of a number of the ideas that have been thrown at the wall in hopes one would stick (and wrong a number of times, too), one thing Easterbrook has understood is that McDonald's is a fast-food company. Improving the quality of ingredients, the restaurants, and his employees is one thing; diverging from that goal to manage a completely separate kind of operation is another.
A seat at the table
McDonald's, of course, has dabbled in fast casual before, helping launch Chipotle Mexican Grill, which for a while was the face of the better-food trend, before completely separating itself from the business.
It's also not uncommon to see other industries have the mass-market giants buy up smaller craft shops. Whether it's Anheuser-Busch InBev buying up craft breweries by the handful, supermarket giants like Kroger buying up regional grocers such as Roundy's, or even Buffalo Wild Wings investing in fast-casual pizza chain PizzaRev and Mexican fast-casual chain R Taco, it's a common tactic to expand beyond the narrow confines of your base customer.
Sometimes it makes sense; other times, not so much. Burger chain Wendy's once went that route, buying up Mexican chain Baja Fresh before selling it at a loss a few years later as Chipotle dominated the scene.
McDonald's scooping up Shake Shack would divert management's attention from fixing the company's iconic burger business. While the turnaround in same-restaurant sales has been impressive, it really has been predicated on expanding its breakfast menu to other parts of the day. For example, it tried the better-burger route by offering one-third pound Angus hamburgers but eventually dropped them from the menu.
A value option is still needed
Certainly someone who knows how to run a fast-casual burger joint might help McDonald's make a better go of it, but there's not all that much symmetry between the lowbrow, value-conscious customer that is McDonald's target demographic and the high-end, price-be-damned millennial that frequents Shake Shack.
Shake Shack, like much of the rest of the better-burger industry, may be running its course -- a trend that got hot for a while, only to be done in by its own success. Analysts point to "meaningful" declines in comps at better burger chains as outlets like The Habit have seen sales growth plunge. Habit's first-quarter comps fell from 13% last year to just 2% this time around, while Shake Shack's own growth was cut by nearly a quarter.
McDonald's does look like it's finally getting its act together after years of wandering in the wilderness, and getting acquisitive by taking on the challenge of running a whole new business model does not seem a smart or even strategic course to take. Rumors can be fun to hear, but smart investors would be wise to ignore them and certainly not trade on them in the hopes they do come true. There's no reason to put any stock in the rumor that McDonald's will be making a play for Shake Shack.
