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Better Buy: McDonald's vs. Yum! Brands

By James Brumley - Jan 16, 2021 at 10:00AM

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Only one of these fast food giants has mastered the art and science of the business.

With nothing more than a passing glance, it would be easy to assume one is more or less the same as the other. McDonald's (MCD -0.70%) is the bigger chain, but Yum! Brands (YUM 0.37%) -- the name behind KFC, Pizza Hut, and Taco Bell -- is certainly no slouch. Besides, fast food is just fast food, right?

Investors looking to make a bet on a restaurant before a full-blown recovery from the COVID-19 slump, however, would be far better served by McDonald's.

Every little detail

That's not a slight on Yum! Brands, for the record. Taco Bell and its Yum! brethren have carved out a respectable piece of the world's $600 billion fast food market. All told, the company operates more than 50,000 locations in more than 150 countries. Technically speaking, it's got more total restaurants under its umbrella than rival McDonald's -- they're just divvied up among three different banners.

Fast food worker handing a drive-thru customer a bag of food through a window.

Image source: Getty Images.

McDonald's has something Yum! doesn't have, though, and isn't likely to have anytime soon. That's one of the world's best-known brand names. McDonald's is consistently found among the world's ten most recognized companies regardless of who's performing the poll.

That's not a coincidence, either. In a relatively normal (read "pre-COVID") 2019, McDonald's spent almost $450 million on advertising and related expenses, a figure that doesn't include franchisees' localized spending.

While the company is spending big, it's also spending smart. Indeed, the fact that the logo hasn't changed in decades is by design, as everything else about the organization's look has adapted to its iconic, memorable golden arches and their unique red and gold colors. Even the lettering font you'll see in its visual promotional material is the stuff of vigorous debate ultimately steered by a chief marketing officer. 

McDonald's isn't just one of the few names to revise the role of chief marketing officer, however. In an effort to ensure it's connecting with customers in the way customers most want, the restaurant chain even employs a chief digital customer engagement officer. Lucy Brady was named to that role a year ago, before the pandemic took hold. With someone in the driver's seat catering to how consumers spend their money in the age of COVID, McDonald's estimates that 20% of 2020 revenue produced within its top six markets was digitally driven. That's a lot. For perspective, less than 6% of Wendy's third-quarter company-wide revenue came from connected customers.

Marketing brilliance

It's admittedly difficult to attribute McDonald's sustained growth -- excluding the coronavirus shutdown slump -- to how seriously it takes its public presence. Rather, the evidence of the chain's mastery of marketing lies in the sheer number of success stories it always seems able to point to.

The company's partnership with rap star Travis Scott is one example of this promotional brilliance. Although not quite the perfectly family-friendly affiliation one might normally expect from the fast food chain, the company's executives' intuition was on target. Driven by the rapper's connection to a particular combo meal, September's sales grew year over year at a double-digit pace. In fact, it was one of the best single months McDonald's had mustered in years.

The restaurant chain is hardly reliant on expensive spokespeople, though. It's also savvy when it comes to the creation of new attention-getting products at the right time.

Case(s) in point: In October, it launched an apple fritter, a blueberry muffin, and a cinnamon roll, largely in an effort to nab market share in a competitive quick breakfast market that exploded during the pandemic. Wendy's entry into this race earlier this year likely played a part in the decision as well. The items, available all day, are ideal additions to the menu, because they're quick and easy to make.

The company also introduced a new crispy chicken sandwich just a few days ago, quickly capitalizing on what's turned into a brutal chicken sandwich war that's involved KFC, Popeye's, Shake Shack, Wendy's, and Chick-Fil-A.

McDonald's already had a couple of chicken choices on the menu, mind you. It just felt it needed more entrants in the race to plug into changes that were already under way. Telsey Advisory Group explained over a year ago that 2019's chicken sandwich market would grow to the tune of 14% that year, jibing with numbers from NPD Group suggesting U.S. chicken sandwich orders grew 4% early that year, while orders of burgers were flat. 

To this end, in an interview with Time magazine published in August of last year, CEO Chris Kempczinski explained: "We're certainly working on ways that we can update and upgrade our chicken offering in the U.S. Suffice to say we will continue to be competing and innovating in chicken," adding, "I don't want to get too into revealing competitive secrets, but I think we are feeling good about where we're at." It sounds more like something a tech CEO would say, illustrating exactly why McDonald's is the dominant name in the business.

Connect the dots. Clearly, McDonald's takes the science (and math and business) of fast food very seriously.

Bottom line

None of this is to suggest Yum! Brands doesn't do comparable market research or marketing tie-ins. It does. Its Taco Bell, KFC, and Pizza Hut chains are going to hold their own for the foreseeable future.

It's not a stretch to say, however, that McDonald's is the industry's "best of breed." Every move it makes is either data-informed, well-conceived, adequately funded, or a combination of all three. That's a key reason earnings growth has been so steady for years and is expected to remain strong for the foreseeable future.

McDonald's past and projected revenue and EPS

Data source: Thomson Reuters. Chart by author.

The revenue dropoff that started in 2014? That's by design. The restaurant chain began selling most of its company-owned stores to franchisees around that time, which crimps the top line but clearly translates into more profits.

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Stocks Mentioned

McDonald's Corporation Stock Quote
McDonald's Corporation
$242.80 (-0.70%) $-1.72
Yum! Brands, Inc. Stock Quote
Yum! Brands, Inc.
$114.50 (0.37%) $0.42
The Wendy's Company Stock Quote
The Wendy's Company
$17.91 (10.05%) $1.64
Shake Shack Inc. Stock Quote
Shake Shack Inc.
$42.73 (2.32%) $0.97

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

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