Source: mcdonalds.com
Topic: Might Wings
Catchy name: Check!
Selling an item in high demand: Check!
Correct pricing: Fail!
If McDonald's (MCD +0.36%) were playing checkers, then two out of three wouldn't be bad. But in the game of restaurant wars, two of three won't cut it. A full sweep is necessary for any long-term effectiveness.
As you might already know, Might Wings wasn't as popular as McDonald's had hoped. The primary reason for this: high pricing. Many customers also complained about the spiciness of the wings; meanwhile, other customers appreciated that little kick. Therefore, pricing was the key reason for moderate demand.
Fortunately, McDonald's devised a plan to fix this problem.
Demand and pricing
Pricing is everything. This is especially the case for a restaurant like McDonald's, which primarily targets low-income consumers. This consumer group is having a difficult time right now ... and for a variety of reasons.
The end of the payroll-tax holiday, a reduction in food-stamp benefits, a lack of wage-growth opportunities, elevated food prices, and volatile gas prices are just some of the headwinds today's low-income consumers face. That being the case, it didn't make much sense for McDonald's to sell one wing for $1.
According to The Wall Street Journal, McDonald's had 10 million pounds of unsold and frozen wings. However, despite this excess inventory, and also according to the Journal, 80% of Mighty Wings were sold at the aforementioned elevated prices. Therefore, now that McDonald's is selling its Mighty Wings at the price of five for $3, there's a good chance that demand will increase significantly and that the majority of the inventory will be unloaded.
McDonald's had the right theory, which was that chicken is in higher demand than beef because it's more affordable. It just forgot to implement the 'affordable' aspect the first time around. Now that the pricing is fair, McDonald's should have an opportunity to steal some share from Burger King Worldwide, Wendy's (WEN +1.90%), and Yum! Brands' (YUM +1.96%). KFC brand.
There are other reasons why McDonald's will have an opportunity to win back some of its customers. Keep in mind that McDonald's saw traffic decline 1.9% in fiscal-year 2013 -- the first time it suffered a traffic decline in a decade. An immediate turnaround in this area is necessary.
McDonald's attempts to keep its throne
Of the three aforementioned companies, Wendy's appears to be the most impressive at the moment. Thanks to its Image Activation plan and successful limited-time offers, Wendy's has high expectations for the future. For instance, it has a long-term goal of $2 million in average unit volume, as well as a projection of 2.5%-3.5% sales growth for reimaged stores open at least once year. According to CEO Emil Brolick, reimaged stores are seeing sustainable sales gains of 10%-20% right now.
Wendy's plans on remodeling another 400-450 locations this year after remodeling 300 locations last year. If 300 remodeled locations made a difference, then 400-450 remodeled locations should have a more significant impact.
While Wendy's is clearly the best growth opportunity of the three, McDonald's still has a significant advantage thanks to its scale. It seems like McDonald's has at least one location in every city and town in the United States, and it plans on opening 1,500-1,600 more this year. This will only increase exposure for McDonald's, which leads to more convenience opportunities for consumers.
Additionally, McDonald's is remodeling 1,000 locations this year. All McDonald's needs now is the right marketing, products, and pricing. Everything else is in place. Perhaps better pricing on Might Wings is a step in the right direction.
There's another reason why McDonald's might be the most appealing option of the three to some investors. McDonald's is currently trading at 17 times earnings while offering a dividend yield of 3.4%. Yum! Brands is trading at 32 times earnings while offering a dividend yield of 2%%, and Wendy's is trading at 87 times earnings while offering a dividend yield of 2.1%.
Yum! Brands offers more diversification because it owns KFC, Taco Bell, and Pizza Hut. Therefore, you might immediately assume that Yum! Brands is a better dividend investment option. This might be the case thanks to diversification as well as international growth, but consider the chart below, which shows McDonald's has been outpacing Yum! Brands for top-line and dividend growth over the past five years:
MCD Revenue (TTM) data by YCharts
Wendy's wasn't included on that chart because of its brand transformation and store sales, which can skew perception.
The Foolish bottom line
If you're a risk-taker and you want growth, then you might want to dig deeper on Wendy's. If you're more risk-averse and want to receive dividend payments with potential for moderate growth (thanks to improved pricing), then you might want to look into McDonald's. Yum! Brands should also present a good opportunity for dividend investors thanks to its diversification and international growth. Please do your own research prior to making any investment decisions.
