For a number of years, the fast-food industry had lost its mojo.
Cheap, calorie-laden meals heavy on the french fries and low on recognizably fresh ingredients were rejected by consumers in favor of pricier, but fresher, fast-casual fare. Instead of grabbing a burger, some chicken nuggets, and a not-quite-ice-cream shake from McDonald's (NYSE:MCD), Restaurant Brands International's (NYSE:QSR) Burger King, or even Wendy's (despite its slightly better reputation for quality), the eating public looked for fancier fare.
Chipotle Mexican Grill (NYSE:CMG) has generally been held up as the leading example of this trend. The chain built its menu around what it calls "food with integrity," made-to-order meals using organic and locally sourced ingredients. It was a stark contrast to the frozen patties and vegetables of questionable origin used in fast food and it was a movement embraced not just by Chipotle, but also Panera Bread (NASDAQ:PNRA.DL), Starbucks (NASDAQ:SBUX), and a number of other chains.
It was a shift in consumer habits that seemed particularly devastating to McDonald's which saw comparable sales in the United States decline for seven straight quarters until finally turning around in Q3 2015 when they grew by 0.9%. It was a small win, but perhaps a sign that the worst was over. Burger King and Wendy's were not hit by fast-casual quite as much, but their sales suffered as well.
Burger King, for example, saw its U.S. sales grow by an anemic 0.2% Q4 2013, dropping 0.9% for the entire year. Those numbers stayed slow through the first two quarters of 2014 (a 0.4% gain in U.S. sales in Q2, after a 0.1% increase in Q1 before numbers began picking up in the second half of the year.
Wendy's also struggled in 2014, seeing its revenue drop from $2.5 billion in 2013 to $2.1 billion in 2014, largely due to being forced to close under-performing stores. In addition, the chain saw its North American comparable sales grow by 1.5% for the year -- better than its rivals, but still slow. Those numbers picked up to 3.2% in North American stores in Q1 2015 building to a solid 4.8% increase for the year as its comeback took hold.
Here's how these three fast-food leaders have used smart menu additions and selectively offered discounts to fight back against their fast-casual competition as well as a look at how putting the fast back in fast food might help them going forward.
Get clever with the menu
The challenge for fast-food eateries is that consumers expect new menu items, but they tend to reject choices that stray too far from the norm. That's why Wendy's Pretzel Bacon Cheeseburger was a big enough hit to be added to the chain's permanent menu (though it was later removed) and McDonald's Mighty Wings were a colossal failure. Burger King perhaps had the most fun with this concept, trying attention-getting menu additions like the Bacon Sundae, before having a menu hit with its hot dog line.
The McDonald's comeback was credited by the company in part to the "Premium Buttermilk Crispy Chicken Deluxe sandwich" and a "return to the classic recipe ingredients" of the Egg McMuffin. Of course, the biggest reason for the chain's ongoing turnaround is its decision to offer a limited version of its breakfast menu all day long. This is something consumers long wanted and it has driven traffic to stores.
"In the U.S., fourth quarter comparable sales increased 5.7%, benefiting from the October launch of All Day Breakfast," the company noted in its Q4, 2015 earnings release.
A smart return to discounts
Chipotle, Panera, and Starbucks proved that consumers would pay higher prices for better quality (or at least the perception of it). For quite a while the various fast-food eateries tried to jump on that trend by adding fancier-sounding burgers, trendy ingredients, and more. That mostly didn't work because adding kale salads or Sriracha sauce to burgers can't change decades of perception.
McDonald's even tried an ad campaign where it answered questions from its customers like "Are the hamburgers made of beef," or "What's in a Chicken McNugget" Those ads did not revive sales and they actually reminded consumers as to why they might consider Chipotle or another fast-casual brand that uses fresher, more-recognizable ingredients.
Recently however, McDonald's, Burger King, and Wendy's have decided to stop trying to be something they are not and instead return to something they have always been known for -- value. But instead of putting tons of items on sale like McDonald's did during the Dollar Menu days -- a practice that drove traffic, but lowered average checks and margins -- all three companies have used careful, focused high-value offers.
Both Wendy's and Burger King have offered $4 meals where customers can get a sandwich, chicken nuggets, fries, and a drink, for $4. McDonald's has used its McPick 2 menu to offer two items for $5 to customers. All three chains have tweaked these offers and cycle items and deals in and out, but they have been careful to keep it tight.
In returning to a value proposition, but limiting it, the chains have something to offer their former customers driven by price without undermining their overall business.
The proof is in the sales
Since turning the corner in Q3 2015, McDonald's has managed to sustain its momentum. The chain saw global comparable sales increase by 6.2% in Q1 while U.S. sales continued their positive momentum, growing by 5.4%, "fueled by the ongoing popularity of All Day Breakfast and the introduction of McPick 2," according to the company.
Burger King also had a strong start to the year, growing comparable sales by 4.6% while Wendy's saw Q1 North American sales grow by 3.6%. CFO Todd Penegor noted in the Q1 earnings release exactly how strong the company's business has been.
"Our two-year North America system comparable sales performance of 6.8% is our strongest in more than a decade, and due to our first-quarter outperformance relative to our annual operating plan, we are increasing our 2016 outlook for both Adjusted Earnings per Share and Adjusted EBITDA," he said.
Next means going back to the future
While all three of these chains are always innovating (Burger King just launched a spa with a 15-seat sauna in Finland) the next frontier may mean going back to something so important it's actually part of the name of the category these brands operate in. To further compete with Chipotle, Panera, Starbucks, and other fast-casual concepts, McDonald's, Burger King, and Wendy's need to put the "fast" back in their operations.
Offering quick service used to be a differentiator for fast-food eateries. People may not have wanted to eat there, but lack of time made them a convenient choice. Starbucks and Panera (but not Chipotle) have minimized, if not eliminated, that advantage by offering mobile ordering through their apps. This keeps customers from having to wait in line, offering a fast-food-like experience, while some fast-food chains endure complaints of slowness as their menus have grown.
To fight back, McDonald's has been testing its own order-ahead app with plans to launch a pilot program later this year, Eater.com reported. In addition, all three chains are experimenting with various versions of ordering kiosks. These, like ordering through an app, not only free up human resources for production (cooking) it also leads to a better customer experience because the odds of the order being correct improve when human interaction is taken out of the process.
In order to hold onto the hard-won gains these three fast-food titans have will have to continue to innovate. Clearly, after being supplanted by fast casual, McDonald's, Wendy's, and Burger King have found a formula that works. Now it's a matter of refining operations while continuing to evolve and embrace new technology without forgetting why customers choose to eat at their chains.
Daniel Kline has no position in any stocks mentioned. He has a gluten allergy which makes fast food pretty rough. The Motley Fool owns shares of and recommends Chipotle Mexican Grill, Panera Bread, 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.