To hear McDonald's (NYSE:MCD) CEO Steve Easterbrook tell it, fast casual burger chains are still eating its lunch and to fight back the fast-food chain needs to lure millennial consumers back with trendy kale bowls, lobster rolls, and premium sirloin burgers.
Last month it gave Japanese diners a chance to go upscale for one night with white tablecloth service featuring foods like "Vichyssoise Mac fries," vegetables, bite-sized burger hors d'oeuvres, and pinky-raising wine glasses filled with iced tea. In Australia, diners can apparently get Belgian waffles, corn fritters with avocado, grilled tomatoes, crumbled feta cheese, tomato relish, and spinach.
And yet sales remain in a nose dive. Global comparable sales fell 0.7% in the second quarter and were down 2% in the U.S., the seventh straight quarter comps fell. It would seem Easterbrook has a point, no?
It's not us, it's you
No. Try telling that to Burger King parent Restaurant Brands International (NYSE:QSR), which also reported second quarter results last week, yet said revenues were up 2.6% year over year to $4.4 billion and comps at the burger chain were 6.7% higher systemwide, its best performance in nearly a decade.
If Five Guys, Smashburger, and The Habit (NASDAQ:HABT) are all stealing away customers, why is Burger King's business booming? How is it immune to the same fast-casual forces that are crushing McDonald's?
In a word, basics. While Burger King does experiment with the menu, it pretty much sticks to its knitting with a menu that doesn't stray very far from its core items. Unlike the Golden Arches, it's not pretending to be something it's not.
For example, in the second quarter earnings release, Restaurant Brands International credited its strong comps numbers to "innovative product launches including the A.1. Hearty Mozzarella Bacon Cheeseburger, Extra Long Pulled Pork Sandwich and Chicken Fries." Not a trendy superfood in the bunch.
Variation on a theme
Lest you think it an aberration, greasy burger, fries, and milk shake hangout Sonic (NASDAQ:SONC) reported similar results as Burger King, turning in a 6% increase in comparables sales as net revenues surged 22% higher. If you ever watch a Sonic commercial you know they absolutely revel in the decidedly "unhealthy" foods that made them famous.
What Burger King and Sonic are doing that McDonald's is not is playing to their strengths. They're fast-food burger shops that offer satisfying traditional meals at a good price, and they're playing up those aspects of their menu.
McDonald's, on the other hand, is running from its menu, hiding the very things that made it an American icon behind a facade of fancy, leafy greens.
CEO Easterbrook says he wants to remake McDonald's into a "modern, progressive burger company," and unfortunately that has skewed the burger joint's priorities. It's not embracing the ideals of the fast-casual dining concept so much as using them to transform the restaurant into something it can never hope to be.
And it's causing the restaurant's franchisees to be filled with fear and loathing. They're the ones footing the bill for each menu change McDonald's tries out, many of which come with a level of complexity to prepare that slows down service. The Create Your Taste platform it introduced last year allowing customers to customize virtually every aspect of their sandwich is symptomatic of the mind-set that has McDonald's in this downward spiral.
Compare that to Burger King, which noted in its earnings conference call with analysts that new menu items were not only fewer in number, but provided "limited operational complexity as we believe this translates to better experience for our guests and more profitability for our franchisees."
Just remember K.I.S.S.
Earlier this year I highlighted how Wendy's (NASDAQ:WEN) also kept its menu simple and had fewer actual menu items as well as fewer options for customization, such as flavors and sizes. Its comparable sales were up 3.2% in its fiscal year 2015 first quarter. McDonald's has taken Burger King's old motto of "have it your way" to a whole new level. Unfortunately that's a much lower place than where it was.
Even though Easterbrook has said he wants to simplify McDonald's menu, his actions show he's doing the opposite. Until the fast-food joint actually stops trying to be all things to all consumers, investors will have to get used to Burger King crushing McDonald's performance each quarter.