French fries are a popular finger food for many people around the world. They can be eaten as snacks or as side dishes that go along with main courses. Like other fast foods, however, french fries are also well-known for their high amounts of calories and fat, posing potential dangers to consumers' health. In order to address the health issue, Burger King Worldwide (UNKNOWN:BKW.DL) has introduced Satisfries, which contain around 40% less fat and 30% fewer calories than fries from McDonald's (NYSE:MCD). Satisfries also have fewer calories and less fat compared to Natural Cut Fries from Wendy's (NASDAQ:WEN).
Healthier food initiatives
Introducing healthier options for consumers is a good strategic move as more and more consumers are drifting away from unhealthy foods that have a lot of fat and calories. Burger King Worldwide believed that this food innovation, combined with improving operations, will enhance the total guest experience and the firm's profitability. Additionally, Burger King Worldwide is bringing back the "Big King" sandwich, which looks like McDonald's "Big Mac" but has fewer calories.
McDonald's has also made a move to introduce healthier food options. With a partnership with the Clinton Foundation's Alliance for a Healthier Generation, McDonald's could leverage its menu and marketing power to increase consumers' access to fruit and vegetables. A choice of fruit, vegetables, or salad will be offered as a substitute for french fries in value meals. This campaign will be implemented in 30%-50% of McDonald's 20 biggest markets by 2016 and will cover 100% of those markets by 2020. By promoting healthier eating habits to the younger generation, McDonald's is gradually changing its image to be a more favorable option for health-conscious consumers.
Although Wendy's does offer salad in its menus, the company's strategy does not focus on promoting healthier eating habits. Instead, the company relies on food innovation in order to drive its operating performance. Recently, it introduced the Pretzel Bacon Cheeseburger, a $4.69 premium burger served on a toasted pretzel bun. Wendy's believed that this new product could be a fast-food game changer, combining three items that Americans love: pretzels, bacon, and cheeseburgers. The introduction of Pretzel Bacon Cheeseburger and a strong marketing calendar helped Wendy's to reach same-restaurant sales of 2%-3% in the second quarter of 2013.
Boosting returns and cash flow by refranchising
Burger King Worldwide and Wendy's are experiencing ongoing global refranchising, selling company-owned restaurants to franchisees. While Burger King Worldwide has sold 519 restaurants in the past twelve months, Wendy's intended to divest 425 restaurants in its total 6,500 restaurants systemwide. This refranchising move will help reduce Wendy's system ownership from 22% to only 15%. Wendy's believes that this strategic move will increase the restaurant margin by at least 50 basis points.
When it comes down to it, both Burger King Worldwide and Wendy's are following the same strategic action that McDonald's has taken in the past few years. Between 2007 and 2012, McDonald's has also reduced its percentage of company-owned restaurants from 23% to 19%. Currently, around 81% of its nearly 35,000 restaurants are franchised, and the company's profit is mainly driven by franchise margins.
My Foolish take
Burger King Worldwide, with its innovative healthier food offerings and refranchising initiatives, will deliver higher returns, cash flow, and profitability in the future. It is not valued cheaply on the market, however, trading at nearly 22.5 times its forward earnings. It is also not so expensive on the market either, compared to a 33 times forward earnings valuation at Wendy's. For income investors, McDonald's is the most suitable, as it offers investors 3.30% dividend yield with a decent payout ratio at 5.6%.
Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide and McDonald's. The Motley Fool owns shares of McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.