McDonald's Brand Strength Still Dominates Its Peers'

Wendy’s and Burger King are constantly innovating in an attempt to steal share from McDonald’s, but McDonald’s has kept its brand strong throughout the years to maintain its lead.

Dan Moskowitz
Dan Moskowitz
Apr 3, 2014 at 1:15PM
Consumer Goods

Source: McDonald's.

McDonald's (NYSE:MCD) might not be the outstanding growth story of yesteryear, but well-run, mature companies are often a good option for long-term investors seeking reliable dividends and resiliency. It's a slower path to wealth, but Foolish investors understand that building your chip stack slowly is often the best path to prosperity.

The following information on Burger King (UNKNOWN:BKW.DL) and Wendy's (NASDAQ:WEN) isn't a knock on these companies whatsoever. This information is simply to point out the strength of the McDonald's brand on a relative basis.

What it takes to make money
If you have ever owned your own business, then you know that in most situations it takes money to make money. In other words, you need to spend money in order to provide your brand with exposure. As brand recognition increases, consumers begin to trust the name. McDonald's has done this so well for decades that eating at McDonald's has become a tradition for many families, workers, and individuals.

For instance, McDonald's spent $787.5 million on advertising in 2012. That's an astronomical number, and it's considerably higher than the No. 2 burger chain, Burger King, which spent $48.3 million on advertising in 2012. In 2013, the average revenue for a domestic McDonald's restaurant versus a domestic Burger King restaurant: $2.6 million vs. $1.12 million.

Looking at Wendy's, company-owned average unit volume came in at $1.51 million in 2013, a vast improvement over 2010, when company-owned averaged unit volume was $1.43 million. Going forward, Wendy's is aiming for franchisee locations to average at least $2 million in unit volume.

Wendy's is making progress with its Image Activation program and limited-time-offer innovative menu concepts. The company plans on increasing the number of remodeled locations from 300 to 700 in 2014, and comps for company-owned restaurants are expected to increase between 2.5% and 3.5%. All that said, while Wendy's is a great turnaround story, it doesn't possess the marketing power of McDonald's. There's one key point to this argument, and it has more to do with long-term trends than numbers.

Brand strength
Happy Meals represent approximately 10% of McDonald's sales. This might not sound significant, but the consumers eating Happy Meals are kids, so the McDonald's brand is ingrained in their minds. Therefore, they're much more likely to eat at McDonald's than Burger King or Wendy's as they age.

You might think McDonald's isn't a healthy dining option, and that the rise of the health-conscious consumer will limit the company's potential. This is a valid point, but keep in mind that McDonald's is constantly looking for ways to innovate in order to cater more to the health-conscious consumer, and that the McDonald's menu will likely look a lot different 10 years from now than it does today. As long as the brand recognition and cash flow are in place, McDonald's will have a lot of maneuverability with menu innovation and marketing.

And while McDonald's has the Happy Meal for kids, what's the name of that kid's meal at Burger King again? Exactly. How about Wendy's? What's its big kid promotion? Oh...

McDonald's also has the Egg McMuffin for breakfast, which dominates the breakfast scene. Does an immensely popular breakfast item at Burger King or Wendy's pop into your mind right away? Highly unlikely. This is a testament to the branding strength of McDonald's.

The Foolish bottom line
Burger King and Wendy's are rebranding themselves. Wendy's appears to be making very good progress. Therefore, Wendy's might present a good investing option for growth investors. However, you must pay for that growth since the stock is currently trading at 84 times earnings. Therefore, risks will be high. 

With McDonald's, you won't be seeing as much growth potential, but you won't have to pay such a high premium, either. McDonald's is currently trading at 18 times earnings. Therefore, you won't need to worry as much about bad news leading to a potential gap-down in the stock price. Most important, if you're investing for the long haul, you should feel at ease knowing that McDonald's has a stronghold on the young consumer, which could lead to positive future results, especially if McDonald's shifts its offerings to better fit the demands of the health-conscious consumer.