McDonald's (NYSE:MCD) just can't catch a break. First, Burger King shows that fast-food joints can still successfully grow sales; now Wendy's (NASDAQ:WEN) has reported higher quarterly comparable sales as well.
At a time when McDonald's is complaining that fast-casual chains are eating its lunch (and breakfast and dinner, too), the burger joint's fast-food brethren are showing it's possible to not only survive in this environment, but thrive, too.
First impressions count
What really must goad McDonald's is that Wendy's is succeeding by projecting a better, more upscale image, something the Golden Arches is failing miserably at.
Where Wendy's recorded a 2% increase in comps on the strength of fancier menu items like the Bacon Portabella Melt on Brioche and the expansion of its Image Activation program, McDonald's reported total revenues tumbled 10% in the second quarter, with U.S. comparable sales dropping 2% from the year-ago period. This despite its own attempts to spruce up its image with trendy foods like kale bowls, lobster rolls, and sirloin burgers.
So, why is Wendy's able to do it, but not McDonald's? Reputation.
McDonald's has long been the go-to place for families wanting decent food at a good value. Coffee in the morning, and burgers and fries throughout the day were the main reasons McDonald's was able to grow into the worldwide empire it presides over today.
But the crown is weighing heavy on its head, and in the mistaken belief that it has to change in order to appeal to some millennial consumer archetype in search of a better class of burger, McDonald's changed its menu.
With the elevation of Steve Easterbrook to CEO, his vision of McDonald's as a "modern, progressive burger company" sends the wrong message to its core customers.
You are what you eat?
McDonald's isn't some high-falutin' burger bistro; its customers are the low- and middle-income crowd looking to feed a family a satisfying meal at a discount.
It's why Burger King's parent Restaurant Brands International (NYSE:QSR) has been a success. It's been focusing on a limited bundle of items at the value end of its menu, and consumers are flocking to it.
Yet Wendy's seems to be a bit of an anomaly.
It opened its 1,000th enhanced-image restaurant earlier this month and plans to have 60% of its stores remodeled and upgraded by 2020.
It's always been about appearances
Importantly, the Image Activation program is leading to more customer traffic and greater sales. Wendy's reported that restaurants that underwent the extreme makeover contributed 170 basis points to the 2.4% increase in comps and helped it achieve a 40 basis point improvement in its restaurant operating margin. Further, company-owned restaurants -- which have a much higher rate of conversion to the Image Activation program -- saw a larger increase in comps than franchised restaurants did.
Because the franchisees are footing the bill for the makeover (Wendy's does offer a financing program for them), it's been a slower conversion rate. But as Wendy's refranchises its restaurants, or sells company-owned stores to franchisees -- it wants to own just 5% of the total restaurants in the system -- it is only considering those who are committed to participating in the Image Activation program.
How is it possible that an upgraded Wendy's is succeeding where McDonald's is not?
The difference is Wendy's has always been considered more of a better burger chain than McDonald's (or Burger King, for that matter). The chain's square burgers were always marketed as a step up from the competition. Its food, while not necessarily thought of as healthier, projected an image that it was of greater quality, regardless of whether that was true or not.
So, a Wendy's that's gives its restaurants an upgraded appearance is not such a stretch as it is for McDonald's to suddenly ascribe to itself an image completely out of character with its roots.
A simple recipe for success
But like Burger King and Sonic, Wendy's also keeps its menu relatively simple. It may dabble with portobello mushrooms and brioche, but it's still a bacon burger in the end. It's not going too far off the reservation. Moreover, its menu remains limited in size and scope with hundreds of fewer options.
Although McDonald's says it wants to limit its menu, it keeps introducing new limited-time offers, items that franchisees are loathe to foot the bill for.
McDonald's needs to get its menu under control and focus intently on the value end of it. It also needs to stop pretending it's something it's not.
The burger chain's rivals have all seemingly figured out that by playing to their strengths, they can easily defend against the encroachment fast-casual chains are making on the industry. McDonald's is instead chasing those chains, and it's losing in the process.
Rich Duprey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.