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Are McDonald's and Wendy's No Longer Fast Food Chains?

By Michael Carter – Mar 22, 2014 at 10:00AM

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New menu selections, new dining designs, and overall improvements to McDonald's and Wendy's have some people asking if these chains can still be categorized as fast food.

In recent years, McDonald's (MCD) and Wendy's (WEN) have renovated their respective chains, seemingly from top to bottom, in an effort to stay relevant while fast-casual restaurant chains like Chipotle (CMG) grow in both market share and popularity.

Despite restaurant industry sales forecasts that surpass $680 billion this year -- nearly $100 billion more than in 2010 -- fast food chains are less optimistic than fast-casual chains on their own outlook. Only 29% of fast food restaurants predict an increase in sales over 2013, while 55% of fast-casual restaurants do.

As McDonald's and Wendy's continue along with their restaurant renovations and brand reimaging improvements, are they becoming less and less fast food options?

A modernized McDonald's. Source: McDonald's 2012 Annual Report.

Recent news for McDonald's and Wendy's
Global same store sales in February for McDonald's decreased another 0.3%. However, the real story in recent months has been the same-store sales decline in the U.S. Sales in February were down 1.4%, which follows January's 3.3% descent.

Even though management during McDonald's last earnings conference call predicted flat same-store sales for 2014, year to date, the U.S. segment has fallen 2.4% -- twice as bad as the 1.2% drop for the same period in 2013.

While Wendy's is still far off from pushing Chipotle's 2013 fourth-quarter 9.3% same-store sales growth numbers, Wendy's is still outperforming McDonald's. For 2013, Wendy's saw same-store sales growth of 1.9%, which exceeded the 1.6% growth it had in 2012.

Additionally, Wendy's system optimization initiative has stayed on schedule as it franchised 384 restaurants last year; franchise revenues increased $14.7 million to over $321 million. 

In short, McDonald's has missed Wall Street expectations for seven straight months while Wendy's has done much the opposite.

Do all these changes equal faster food?
McDonald's is currently in the middle of the biggest store-by-store makeover in its 56-year history. It has invested over $1 billion to renovate thousands of its 35,429 restaurants and counting. Renovations include updated roofs, paint, fiberglass designs, ergonomic chairs, double-lane drive-thrus, contemporary lamps, and most recently -- new prep tables for the kitchen.

Similarly, Wendy's has placed its reimaging efforts on a new logo, new employee uniforms, new food packaging, and new restaurant layouts. One of Wendy's bigger bets is on enclosed electric fireplaces that cost between $4,000-6,000 -- but serve no purpose outside of decoration.

When you add these restaurant renovations to the menu changes for both McDonald's and Wendy's, is it really realistic to believe that these changes won't hurt ordering times?

One of Wendy's new restaurant concepts that include a fireplace (far back). Source: Wendy's Investor Presentation.

While Wendy's has the fastest drive-thru service of the major chains, coming in at 134 seconds, McDonald's recently recorded its slowest speed in the 15-year history of the QSR Magazine study, coming in at 189 seconds. 

Therefore, there is a conflict of interest when McDonald's, earlier this year, stated it would be adding prep tables with the goal of giving customers more customization to their orders. Additionally, McDonald's has been adding iPads in test locations to give customers the opportunity to order their own burgers. However, the system is currently redundant, because right after the customer enters their order on the iPad, a McDonald's employee still needs to ring up the order on the register. 

Likewise, the contracting company involved in the Wendy's interior makeovers said the renovations will help slow down the fast-food experience.

More threats to the fast food experience?
The biggest question for McDonald's shareholders is most likely when same-store sales will stop falling in the U.S. McDonald's hopes its goal of becoming "more of a coffee culture" will help bring customers back. Despite improvements in its breakfast lineup, McDonald's may be drifting away from its real bread and butter -- burgers.

In a recent poll earlier this year, McDonald's ranked outside the top 10 on burger taste, food temperature, and preparation. Of the traits commonly followed by great brands and agreed on by many experts in the industry, three of them include ignoring trends, not chasing customers, and staying committed to ideas. McDonald's appears to breaking all three.

In contrast to both McDonald's and Wendy's, Chipotle has maintained its core values and ignored outside trends. This has allowed Chipotle to keep costs low with a focus on efficiency and speed of service.

Somewhere down the line, someone will need to pay for the renovations taking place at McDonald's and Wendy's.

Will McDonald's hamburgers ever rank at the top again? Source: McDonald's 2012 Annual Report.

Bottom line
In terms of price, fast food is currently defined as offering meals for $6 or less. Fast-casual is defined within the $7-$10 range. If this is true, then many meals at McDonald's and Wendy's fall within the fast-casual definition. This is especially true when you look at a McDonald's combo meal, or any of Wendy's new salads, like the BBQ Ranch Chicken Salad, which is currently sold for $6.19 in the full-size portion.

Speaking strictly of ordering times, McDonald's has never been slower, at over three minutes per customer. Wendy's is leading all major chains, but many of its improvements and frequent new menu additions present obstacles to maintain its industry leading speed.

In the end, fast food as we know it may need to be redefined, again.

Michael Carter has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and McDonald's. The Motley Fool owns shares of Chipotle Mexican Grill and McDonald's. We Fools may not all hold the same opinions, but we all believe considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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