For quite a while, fast food was out of vogue. Fast casual, with its higher prices, slightly more recognizable ingredients, and catchphrase-worthy fare -- "organic," "farm-to-table," "locally sourced," and so on -- captured the hearts of investors and the dining public alike.
That success came very much at the expense of companies such as Restaurant Brands International (NYSE:QSR), the parent company of Burger King and the Tim Hortons coffee and doughnut chain. Cheap burgers, even ones claimed to be flame-broiled and decent, inexpensive coffee, couldn't compare with artisan burgers with the meat hand-ground on site, or java brewed with beans that have a better pedigree than most Yale professors.
Suddenly, cheap and tasty no longer drove the market. It used to be that Burger King, and its rival McDonald's (NYSE:MCD), could simply throw a new cheese or sauce on a burger and that would drive customers. Add in a few contests or promotions tied to hit movies, and people kept coming through the doors to cram their faces full of Whoppers, Big Macs, fried nuggets of what both chains insist is white-meat chicken, and, of course, fries.
For a while, fast food equaled bad, and that was reflected in the performance of chains such as Burger King and even Tim Hortons. Now, however, the tide may have turned leading to three reasons Restaurant Brands International stock may rise.
Better has not always proven to be better
Chipotle Mexican Grill (NYSE:CMG) has led the fast-casual movement toward using better ingredients in quick-serve restaurants. The chain even uses the phrase "food with integrity" on its website, which it partly defines as "using the best ingredients and preparing them by hand."
That bit of snobbery clearly clicked with consumers. They were willing to pay more to know that the pork in their burrito came from a pig that lived on a farm nearby, or that the avocado in their guacamole was ground by someone in the store.
It was a good bit of marketing made all the better by apparently being sincere in its promise. The problem is that if you tell people you're better than your rivals, then you need to live up to it, and Chipotle did not. The chain ended 2015 with a highly publicized E. coli scandal that rocked its business, sending Q4 income down 44%, according to USA Today.
The company will recover, or at least somewhat bounce back from the bad press (and the fact that people did get sick after eating in some of its stores, but a door has been opened for chains such as Burger King. It's not that fast casual is going away, but this scandal sent people away from Chipotle, and some of them clearly went elsewhere.
In Q4, sales were up 8.8% systemwide at Burger King and a whopping 12.4% at Tim Hortons.
Starbucks may have helped Tims
Starbucks (NASDAQ:SBUX) operates cafes while Tim Hortons is a doughnut shop. One is a bit of an upscale play, while the other has more of a working-class sensibility. You go to Starbucks for fancy lattes, upscale pastries, and drinks that take 10 minutes to order because they contain soy, alternative natural sweeteners, and other such frou-frou whatnot. Tim Hortons sells good coffee poured from a pot in three basic varieties -- original blend, dark roast, and decaf. It also offers doughnuts, breakfast sandwiches, and some lunch items.
Yes, the Canadian chain has fancier stuff on the menu, but it's the basics that are front and center, and that may help it capture a customer Starbucks has pushed away -- the guy or gal who just wants a basic, cheap cup of coffee. The chain with the green Siren logo has recently changed its Rewards program, tilting it in favor of people who spend more money per visit.
The change made to Starbucks' rewards program makes it take slightly longer for customers in many markets who simply order a small (tall) or medium (grande) coffee to earn a free drink (though because of varied pricing depending upon market, that's not always true). This could anger those customers and send them toward a chain that caters more toward people wanting a basic cup of coffee.
Discounting is back
For many years, McDonald's led a fast-food pricing war that pushed margins ever lower. In the Dollar Menu days, chains including Burger King tried to follow suit, leading to a large selection of cheap loss leaders that didn't cause customers to buy more. Instead, these discount programs often had people cherry-picking the menu for deals and leaving with a full stomach cheaply.
Now, both chains have landed upon a new discount strategy that makes a lot more sense. Instead of offering a ton of deals across the menu, keep the discounts focused. In Burger King's case, this has resulted in the 5-for-$4 deal, a simple promotion where customers pay $4 for a bacon cheeseburger, fries, four chicken nuggets, a drink, and a cookie. There are other discounts on the menu, but this is the core "value" offer, and it's a smart play.
The company can still attract people who are being money conscious, but by offering such a specific meal, many people will likely opt for something else. That should lead to higher checks and more sales per store. It should also protect the company from the very low checks generated when McDonald's was pushing dollar pricing.
Burger King has a line to straddle here. It needs to offer value without being so cheap that its best sellers are money losers. The 5-for-$4 deal does that smartly, and it should help the company keep its turnaround moving forward.