In the earnings results it posted last month, McDonald's (NYSE:MCD) blamed "sustained competitive activity" as one reason why fewer customers visited its restaurants in the prior three months. That shopper exodus helped push Mickey D's comparable-store sales lower by 2% in the fourth quarter.
Now we know at least one source of the tougher competition at home: Burger King.
The fast food giant announced this week that its comparable-store sales jumped higher by 4.2% in the fourth quarter. It was Burger King's fourth straight quarter of growth, as compared to McDonald's negative result through all of 2014.
Balancing premium and value
Burger King got help from limited-time offerings like the popular chicken fries and A1 ultimate bacon cheeseburger. Those innovations sent new customers streaming into restaurants while the value menu kept existing fans of the franchise happy.
Overall, Burger King was able to find just the right mix of premium and low-priced products to push sales profitably higher without overwhelming franchisee's kitchens.
McDonald's hasn't had much success at introducing hit products lately, and management admitted that menu complexity became a real problem. McDonald's aims to turn the tide with a few big adjustments, including its "create your taste" burger customizing initiative. Here's how outgoing CEO Don Thompson described the strategy last month:
We are asserting McDonald's burger leadership by offering greater customization and choice. Not only does "create your taste" provide new menu news that excites consumers, it has the potential to lift sales of core classics by bringing more customers into our restaurants.
Investors haven't seen McDonald's changes spark a rebound yet: Comparable sales were flat for the month of January. But we're still in the early innings of the menu redesign, so stay tuned.
Meanwhile, Burger King's management also credits store remodels with helping it post that strong growth in 2014. In fact, the company was getting such a solid return on its capital investments that it sped up its modernizing effort and redesigned almost half of the store base one year ahead of schedule.
The result has been an average sales lift in remodeled stores of as much as 14%.
McDonald's actually has a major competitive advantage, here, as it generates enough cash that it can dwarf any competitor's annual capital spending budget. Even Mickey D's scaled-back investment goal for 2015 calls for billions to be spent in growing the store base and remodeling restaurants. Compare that to the $250 million Chipotle invested in 2014, and you can see how McDonald's is in a league of its own.
The bright side for McDonald's investors
I see Burger King's recent wins as, in fact, good news for McDonald's. After all, they show that customers aren't running away from fast food as much as they're shunning the Golden Arches at the moment.
At least that means the company has a shot at convincing many of its former fans to come back. That won't be easy, but I think the fast food leader is up to this challenge. It has the budget to make massive investments to improve the customer experience. Adding a few great menu choices should then get customer traffic headed higher again, which McDonald's can use to turn into its own growth rebound.