McDonald's (MCD 0.86%) Mighty Wings are officially out. Not surprisingly, the wing's release coincided with the NFL season kickoff. Considering wings account for 39% of Buffalo Wild Wings' (BWLD +0.00%) sales, and football season is its biggest time of year, some investors worry that B-Wild's revenue could take a hit from the new competition.
A similar situation sparked investor panic once before. Last year Yum!'s Taco Bell (YUM 0.36%) launched a new menu called "Cantina Bell" to better compete with Chipotle Mexican Grill (CMG 1.70%). Investor fear from this menu-launch sent Chipotle's shares south -- plummeting over 40%. But Buffalo investors should relax, McDonald's Mighty Wings pose no significant business threat.
Taco Bell vs Chipotle
To illustrate the "competition" between McDonald's and Buffalo Wild Wings, we turn to Taco Bell and Chipotle Mexican Grill. Chipotle's management never feared the Cantina Bell menu because it recognized the two companies' customer bases are very different. It was confident that its customers would continue to come, and that's exactly what happened. Cantina Bell was launched in July 2012. The chart below shows that while Chipotle's stock price has been a roller coaster, revenue and net income have steadily climbed even with new competition, despite warnings from famous hedge fund manager David Einhorn.
CMG Revenue TTM data by YCharts
Revenue and earnings growth is primarily driven by new restaurant openings. But in the third quarter of 2012 -- the first quarter with competition from Cantina Bell -- comparable sales were unscathed, rising 4.8%. The stock dropped on fear, not financial metrics. As investors began to see that the threat of Taco Bell eating into Chipotle's profits was unrealistic, the stock steadily recovered.
So, is Taco Bell's Cantina Bell menu completely irrelevant? No way. It may not be a Chipotle-killer, but it's one of the reasons Taco Bell has grown same-store sales for six consecutive quarters. Other factors include Doritos Locos Tacos and an upcoming breakfast launch. These initiatives are boosting Taco Bell's numbers -- a big deal for Yum! since Taco Bell currently accounts for 60% of Yum!'s US operating profit.
As for Chipotle, I'm thinking investors will think twice before doubting this story again. Last quarter revenue was up 18% year over year, earnings per share were up 10%, and comp-sales were up 5.5%. It also expects to open around 180 locations this year. These aren't signs of a company folding from fast food competition.
McDonald's vs Buffalo Wild Wings
Returning to Buffalo Wild Wings, there is no realistic chance of Mighty Wings stealing away customers. The two companies have very different customer bases. Consider that the majority of B-Wilds' customers go for more than just the wings. They go for the big-screens, the environment, and beer -- things that McDonald's can't offer them.
However, I do believe the publicity these wings are getting will help boost McDonald's comp-sales next quarter -- something this company desperately needs. First quarter this year, comp-sales were down 1.2%. Last quarter comp-sales were up just 1%. McDonald's is hoping for a bigger boost than that, and by offering chicken wings during football season it has a decent chance.
As we've seen, fast food restaurants are taking plays from fast casual's book. Yet these moves aren't effecting fast casual results; they are boosting fast-food comp-sales.
Wendy's vs all other burger joints?
Burger chain Wendy's (WEN 3.99%) decided to emulate fast casual as well when it revamped its menu in 2009. New fast-casual burger chains like Five Guys and Smashburger are offering more artisan menu items, and the public is crazy for them.
Wendy's Senior VP Denny Lynch says, "I promise you three, four, five years ago, we couldn't pronounce 'asiago,' we certainly wouldn't have known it was a smoked cheese that tastes great with chicken." This is a humble admission of a need to learn and grow as a company to be competitive. In addition to asiago cheese, the chain now offers things like five-grain flatbread, smokey honey mustard, and even a pretzel bun.
Wendy's revamped menu hasn't hindered fast casual burger chains' growth in the least -- For example, Smashburger was founded in 2007, and has since grown to over 200 locations. But this new menu has allowed Wendy's to surpass Burger King in sales in 2012 and become the #2 American burger chain behind McDonald's.
Conclusion
Fast casual continues to be the hottest segment in the restaurant sector. I don't think investors should be betting against any fast-casual chain right now. Places like Chipotle and Buffalo Wild Wings are clearly scratching an itch consumers have.
When fast food imitates fast casual, fast casual isn't affected at all. But this move does make a fast food chain more competitive against other fast food chains. Wendy's and Taco Bell are doing a good job at this and continue reaping the benefits.
