The king is back.
After years of playing second fiddle to McDonald's Corp. (NYSE:MCD), Burger King's sales are now soaring while the Golden Arches is in panic mode.
The Burger King division of Restaurant Brands International (NYSE:QSR) posted a 6.9% jump in same-store sales in North America -- its best performance in its home region in nine years. With sky-high beef prices squeezing restaurant chains, Burger King was able to find growth with cheap chicken nuggets and other promotional items. Management also cited the success of its two-for-$5 menu which brought back the Yumbo ham-and-cheese sandwich from 40 years ago, as well as the Spicy BLT Whopper. Burger King is also hoping to fuel growth by making Chicken Fries a permanent menu item.
Worldwide, same-store sales increased by a solid 4.6% at Burger King, its best performance in nearly seven years. At its partner chain, Tim Horton's, comparable sales jumped 5.3%.
On the earnings call, management said the success at Burger King had come from focusing on menu, image, marketing communications, and operations. In many ways, these core strategies differ from McDonald's, which seems to be focused on reinventing its brand.
Go with your strengths, not your weaknesses
Menu growth at Burger King was driven by a focus on premium and value items. For instance, Burger King offered limited-time items such as the Spicy BLT Whopper and Bacon Cheddar Tendercrisp on the premium side, and two-for-$4 and two-for-$5 deals on the value side. Importantly, the limited-edition Whoppers did not involve any new ingredients, and so did not add to any back-of-the-house complexity. McDonald's franchisees, meanwhile, have complained for years about a bloated menu, operational complexity, and excessive equipment purchases. Many are worried that the Create Your Taste customizable menu that McDonald's plans to roll out this year will put a dent into their profits and slow down service.
Burger King has also been remodeling new stores, and has completed remodels on 40% of its North American base. On average, renovated stores see a sales increase of 10%-14%.
The company continues to expand aggressively abroad, adding 42 new international restaurants in the quarter and expects that pace to increase in the second half of the year.
While Burger King has a well-defined strategy for boosting performance, McDonald's seems to be throwing ideas at the wall and hoping for something stick. Much attention has been given to competition from fast casual chains like Chipotle Mexican Grill, but really McDonald's closest rivals are Burger King and Wendy's. And with 7,000 Burger Kings in North America, compared to less than 2,000 Chipotles, Burger King is also the much larger threat. Therefore, Burger King is most likely to benefit from McDonald's missteps.
While Burger King brought back Chicken Fries, a cheap, popular item, McDonald's reintroduced Chicken Selects earlier this year, and though the premium chicken tenders have been one of its most popular new items in the last decade, McDonald's only brought it back temporarily. In doing so, the company seems to be ignoring the demands of its customers. Similarly, the company's rollout of a sirloin burger adds a new high-priced ingredient that will complicate operations. Burger King's Spicy BLT Whopper and other limited-time offers in the past quarter did not require new ingredients, and therefore did not delay service.
The decision seems to fit a pattern in McDonald's behavior where it's running from its target market of low-to-middle income consumers looking for a quick, tasty meal, and focusing instead on the millennials who seems to have been won over by Chipotle and Starbucks. In its recent earnings report, CEO Steve Easterbrook said many times that the company aspires to become a modern, progressive burger chain, indicating a wholesale revamp of the brand may be coming.
Restaurant Brands CEO Daniel Schwartz holds no similar delusions of grandeur for his company. Schwartz is just aiming to execute on a straightforward game plan -- deliver menu items customers want, improve store image, and expand abroad. A plan like that one is easy enough to execute, whereas Easterbrook's goal of being modern and progressive is vague enough as to be meaningless.
For Burger King's comparable sales to jump 7% at a time when McDonald's are falling nearly 3% should be a red flag for Mickey D's management. McDonald's needs to own its core market before it chases after the fast casual niche. Whatever turnaround plan management delivers on May 4 must address this discrepancy, otherwise McDonald's will continue to flounder while Burger King polishes its crown.
Jeremy Bowman owns shares of Apple and Chipotle Mexican Grill. The Motley Fool recommends Apple, Chipotle Mexican Grill, McDonald's, and Starbucks. The Motley Fool owns shares of Apple, Chipotle Mexican Grill, and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.