At the end of October, Burger King (BKW.DL) released its newest burger, the Big King, which was claimed by many commentators to be a direct assault on McDonald's (MCD 0.26%) iconic Big Mac.
So far, reviews have been mixed on the new burger. However, most reviewers agree that Burger King has definitely made a disruptive move by bringing this new offering to market.
What's more, this new burger was brought to market just after Burger King announced blow-out quarterly results that beat expectations. Unfortunately, McDonald's also released data at around the same time which revealed that the company's same store sales were stagnating .
All in all, this presents a very interesting picture. Now, from an investment perspective, Burger King looks more attractive than its larger, more established peer.
Driving forward
Indeed, Burger King has recently been proactive in meeting changing consumer demands through offerings like SatisFries and the new Big King. The company is also cutting back on its advertising spending, instead focusing on a series of media stunts, like the offer to buy Elvis Presley's former Beverly Hills home for $3.69 million -- it's no coincidence that the Big King burger is also priced at $3.69 .
In comparison, McDonald's has been slower to change its menu to meet consumer demand. In fact, one of the company's most recent menu additions, chicken wings, made headlines for not meeting expectations due to pricing and taste issues.
What's more, McDonald's is having to raise prices on its Dollar Menu to feature items in the range of $1 to $5. Unfortunately, it appears that selling items for $1 or less has pressured the company's bottom line. It is unclear what affect this will have on sales. The dollar menu accounts for around 13% of McDonald's annual sales, so the company risks alienating consumers if this new menu style does not go down well .
Peers also driving for change
Wendy's (WEN 1.05%) has also been working hard to rejuvenate its menu offering like Burger King, and so far the results are encouraging.
Wendy's recently reported third quarter company-operated same-store sales growth of 3.2%, which came in lower than the 3.9% predicted by analysts. However, the company did raise its full-year earnings estimate from $0.20-$0.22 a share to $0.25 a share. What's more, management reported that sales of two of the company's new menu offerings, the Pretzel Bacon Cheeseburger and the Pretzel Pub Chicken sandwich, were impressive .
Franchising for profit
Like Burger King, Wendy's is also changing its business model to a franchise-based structure. This means that the company is selling off company-owned restaurants to franchisees to ensure a more predictable cash flow and higher margins. The company plans to complete the sale of 425 company-operated restaurants by the second quarter of 2014.
So far this strategy has worked extremely well for Burger King. Indeed, although at the end of the fiscal third quarter Burger King's revenue had declined nearly 40% year-over-year, earnings before interest, tax depreciation, and amortization, or EBITDA, expanded nearly 10%. What's more, the company's EBITDA margin widened from 36% to 60% during the same period.
These figures are highly promising for Wendy's investors and indicate the kind of returns that could be ahead. In addition, Burger King's new franchise model has allowed the company to become highly cash generative. In particular, the company's cash balance has expanded 56% year-on-year at the end of the third fiscal quarter .
These returns are impressive, more so than those of McDonald's, which is struggling to grow both its top and bottom lines.
Foolish summary
All in all, it is worth noting the changes that both Burger King and Wendy's are undertaking to rejuvenate their businesses and improve profit margins. In particular, new menu offerings and complete franchise based business models are driving both sales and cash flow, which in the long-term should lead to impressive shareholder returns. However, perhaps it's time to avoid McDonald's for now.
