Please ensure Javascript is enabled for purposes of website accessibility

Is The Habit Going to Become More Like McDonald's?

By Rich Duprey - Nov 16, 2017 at 12:24PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The better-burger shop is stealing ideas from its fast-food rival.

It wasn't that long ago that McDonald's (MCD 1.77%) was copying the playbook of its fast-casual rivals, sprucing up its menu with trendy foods like kale bowls, lobster rolls, and sirloin burgers in an attempt to woo back millennials and spur sales growth.

While those efforts had little actual impact on the burger joint's sales trajectory, now that fast food is on the rise again and fast casual is declining, we're seeing better-burger rivals mimicking the more successful aspects of McDonald's business. The Habit (HABT), for instance, just announced it's going to add more drive-thru windows at its restaurants and will begin offering value menu items.

Drive-thru lanes at restaurant

Image source: Getty Images.

Convenience is key

The drive-thru has always been a key element of the success of both McDonald's and the quick-serve industry as a whole. But where the drive-thru window accounts for 21% of sales for the entire restaurant industry, it represents around 70% of McDonald's sales.

You expect a drive-thru at a McDonald's, but as restaurants struggle to attract customers, the drive-thru is no longer the sole province of quick-serve joints. They're spreading to other chains that you wouldn't necessarily or immediately associate with having one, like Panera Bread and Starbucks.

The Habit isn't new to drive-thru windows, as they're featured at around 30% of its locations, but with its comparable-store sales turning negative for the first time in 13 years, improving the customer experience and making it easier for diners to pick up an order is leading the chain to install more of them.

During the company's recent conference call with analysts, President and CEO Russ Bendel said the company plans to open roughly 30 new company-operated restaurants next year and six to eight franchised locations. It expects about half of its 2018 openings will be drive-thrus. He expects an even greater percentage the year after.

"We believe drive-thrus allow us to appeal to a broader audience and develop in locations where we typically wouldn't with a traditional location as well as positioning the brand to meet the evolving needs of the consumer who continues to place high importance on convenience," he said.

The reason McDonald's, The Habit, and other chains have come to love the drive-thru window is they generate higher returns. The Habit says stores with drive-thrus achieve returns in excess of the chain's historical cash-on-cash returns of 40%.

Dollar bill on plate

Image source: Getty Images.

Everyone loves a bargain

Certainly drive-thrus will help the better-burger chain provide the convenience customers are looking for, even if drive-thru locations are more costly to build, but arguably the more dramatic news is The Habit's decision to begin offering value menu items.

Along with fresher ingredients and a nicer ambience, one of the big differences between fast-casual chains and their quick-serve counterparts is price. An Original Charburger at The Habit will run you $7.65 while a basic ShackBurger at Shake Shack will set you back $5.55. Grilled chicken sandwiches will run you over $6 at both locations. Conversely, a basic burger at McDonald's goes for around a buck, and for less than $6, you can get a Big Mac meal that includes fries and a drink. So, too, with a grilled chicken sandwich.

Now The Habit says it wants to add "value" options. While we're not about to see a dollar menu, the chain notes it's being pinched by the value price war being waged among McDonald's, Wendy's, and Burger King.

Bendel noted McDonald's particular ability to "inflict pain" on its rivals, and said value offerings are a big reason why. So now The Habit is going to try its hand at a value offering, though the company said it won't be discounting its core products or brands. It promised to have more to share in the next few months.

There may come a time when you won't really be able to tell fast food from fast casual. Both niches will have borrowed so much from one another that they'll all look fairly similar. But as McDonald's looks forward to 2018 and re-energizing itself, it might not be surprising to see The Habit cribbing from more of its playbook.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

The Habit Restaurants, Inc. Stock Quote
The Habit Restaurants, Inc.
HABT
McDonald's Corporation Stock Quote
McDonald's Corporation
MCD
$247.90 (1.77%) $4.32

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
321%
 
S&P 500 Returns
111%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/25/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.