What Do Burger Eaters Want?

Over the past decade, the "better-burger" trend in the United States has gained plenty of traction, with chains like Five Guys and Shake Shack luring in plenty of folks looking for a higher-quality option when they indulge. McDonald's (MCD -0.22%) has been pivoting a bit in that direction, and lo and behold, it worked. According to the company, Quarter Pounder sales are up 30% since it switched from frozen beef to fresh. But in another burger trend-related story that investors may want to note, shares of vegetarian-burger maker Beyond Meat (BYND -0.41%) have fallen almost 30% within the past week.

In this segment of the MarketFoolery podcast, host Chris Hill and Motley Fool contributor Dan Kline talk about some of the underlying drivers of that impressive gain for McDonald's, the supply chain issues that may be constraining it from going big in the U.S. with a high-quality meatless burger, the subtleties of what companies can succeed in which areas in the quick-serve market, whether the alternative burger trend has legs, and more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on June 24, 2019.

Chris Hill: Let's move over to the burger industry. A couple of things going on. McDonald's announced that sales of the Quarter Pounder have risen 30% since the company switched from frozen patties to fresh beef. You have to believe that on some level, the people who run Five Guys, Shake Shack, Culver's, all these other burger businesses that have been using fresh beef for a long time, they're rolling their eyes like, "Yeah, no kidding. We already knew that..."

Dan Kline: It's the first time in a decade they've gained burger share. There's no statistic for burger share. They're telling you this, but that's a very soft number. But, yeah, who would think, make your product less terrible and more passable? We both have kids. There is a certain point in the age of most kids where McDonald's has to be part of your repertoire, whether that's just in an airport where they're not going to eat anything else that's available, or it's 05:30 p.m., there's homework to do, and you're just stopping at McDonald's. To be able to offer Mom and Dad a slightly passable, less terrible burger -- I know my kid won't go to Five Guys because he won't eat a cheeseburger. He wants Chicken McNuggets or some variation of fried chicken things. There's a lot of places that aren't available to us. If, as a parent, I had to go to a McDonald's, but at least I could get a burger that's not a gray circle.

Hill: Couple this with the fact that in the past week, shares of Beyond Meat have fallen nearly 30%. I look at it and I think, "Yeah, it still seems outrageously priced." But I'm curious where you think all of this is going. Part of this McDonald's story was a conversation with one of their spokespeople about this industry, the non-meat burger, which McDonald's is already doing in Germany. They have said publicly, "We don't have any current plans to roll this out beyond Germany." But I have to believe that they are watching it closely.

Kline: They will, but it's a supply issue. Beyond Meat cannot supply McDonald's right now. Again, I'm not speaking for them. Maybe they can.

Hill: I'm not speaking for them, either -- and I know they can't. This is McDonald's we're talking about!

Kline: I would assume that McDonald's is talking with the various players in that space and they're figuring out when they can roll this out. You cannot cede this to Burger King. I've talked about this on the various shows. I actually think the fake burger, it's kind of like, every restaurant had a gluten-free menu for a while and dropped it. Or you go and you're like, "Can I get the gluten-free bread?" And they're like, "Do we have that in the back?" I don't think the person who wants a meatless burger is seeking out McDonald's or Burger King. I think it's a convenience for when they have to be there. That doesn't speak to me of something that's going to be on the menu six months from now. This feels like something that's going to fall off. Not that there's not a huge demand for it, but that demand is going to be at nicer places.

Hill: The counter to that is the example that you used with your son. We can't go to McDonald's because they don't have the meatless version that so-and-so wants when you're on a road trip. And all of a sudden it's like, oh, they have it now.

Kline: Maybe I'm wrong, but I think the market demand for a fresh meat burger from someone who was begrudgingly going to McDonalds is a lot higher than the demand for a meatless burger. I go back to every time McDonald's has tried to make healthy salads a focus, it doesn't work. Two years later, they come out and say, "Hey, turns out people don't want to come here for healthy." I don't think a product's going to work if it isn't luring a certain amount of people off the street. I think those people are always going to choose Chipotle or places that are more naturally meatless options. And, maybe a little snobby, better? There's probably a correlation between vegan and snobby some of the time, not to be too much of a jerk. I think there might be a little disdain for McDonald's in that crowd?

Hill: I think food snobs come in all stripes and sizes. There are pizza snobs. I'm a little bit of a bagel snob. There was a great piece in The Washington Post over the weekend about great casual restaurants in the D.C. area. One of them is this relatively new place in Washington, D.C. It's a bagel place, and it's called Call Your Mother. And the write-up of The Washington Post said, in New York City, bagels are religion. In Washington, D.C. bagels are a prayer, as in, "I wish to God I could find a good bagel somewhere in this city."

Kline: Well, don't come to Florida. Florida is the Land of Your Mother From New England or New York Overnights You Bagels.

Hill: Just to wrap up on this, I don't want to overlook the point you made about the supply chain. It's worth remembering that McDonald's is such a large business that it has in the past, and will probably continue in the future, to single-handedly sway the beef market, just in terms of beef as a commodity and beef prices. McDonald's has that power. So, yes, once they decide, "We're going to flip this switch," even if it's just on a McRib-level test, just testing it for one month, that is still going to be a massive order for someone to fulfill. Whether it's Beyond Meat or someone else or some combination thereof, and it just gets branded as a McDonald's meatless burger, whoever steps up to do that, they'd better nail it.

Kline: It's a tough call. If you remember, a couple of years ago, they did the Mighty Wing.

Hill: I don't remember that at all.

Kline: They tested chicken wings. It was a national rollout. And that actually forced Buffalo Wild Wings to offer deal prices on boneless wings, because the price of wings went up. They were running all their promotions around boneless wings, because McDonald's single-handedly caused the market -- and then, when they got out of it, they actually had a huge surplus, so they kept them on the menu without promotion just to get rid of, I guess they had a lot of frozen wings somewhere. So, yeah, absolutely. They can completely change how everything goes in this entire industry. It still won't make Beyond Meat worth its current valuation.