→ Burger King is mastering the art of being new without being overly innovative. Its latest addition tom its menu is the A.1. Ultimate Bacon Cheeseburger. That sounds like the sauce is the star, but what’s most interesting here is that the build is two quarter-pound patties topped with bacon, melted American cheese (plus the A.1. Sauce). Once again the chain has kept truly new ingredients to a minimum while rearranging familiar products. But a half-pound burger is something different for BK.
→ What’s next for McDonald’s? It, too, is trying to promote “core” items rather than develop new entrees. So don’t be surprised if what’s coming is a new addition to the McWrap line. In Canada, McDonald’s has added a Crispy Asian Shrimp option for what’s called the Signature McWrap there. Ingredients are crispy fried shrimp, sweet & spicy Thai sauce, Asian greens, grilled vegetables and “garlic mayo-style sauce” wrapped in a whole-wheat tortilla.
New McWrap in Canada
Scoring enough shrimp to do the same LTO in the U.S. might be difficult. If so, some other extension of McWrap could be in the works.
→ What’s Wendy’s doing? It’s testing a “build-your-own” option near its Columbus, Ohio, headquarters, according to QSR. Diners choose protein (beef or spicy, homestyle or grilled chicken), bun (premium or pretzel), cheese (five choices), sauces (eight choices) and toppings (pickle, red onion, tomato, lettuce, spring mix, jalapeňos, sautéed onions and bacon).
That’s not really much different than normal ordering, where diners can add or subtract elements. But diners are likely to perceive it to be both different and better. A single starts about $4.
→ The latest data from NPD shows that burger QSRs are suffering along with the rest of the industry. Customer traffic to burger QSRs was down 2% during the 12 months ended May 2014. The industry had 61 billion customer visits during that period, but that’s still down 1.3 billion visits compared with pre-recession customer counts.
Byron’s patty melt
→ Arby’s comes up with the oddest advertising taglines. In 2012, it gave us the silly “Slicing Up Freshness,” which was quickly dropped. Agency Crispin Porter + Bogusky went away and has been replaced by Fallon, which now gives us the almost equally awkward “We Have the Meats.” Say what?
→ British burger chain Byron is paying homage to legendary burger joint Tiny Naylor’s, a fixture on Sunset Boulevard in Los Angeles from 1958 to 1984. Famed for its carhops on roller skates, it is credited by some as being the birthplace of the patty melt, which Byron calls, “the mutant offspring of a hamburger and a cheese toastie.”
Byron unveils its own version of the patty melt this week (see right).
→ And speaking of retro diners, the West Coast’s Ruby’s Diner chain celebrates 32 years in business today (July 28) with a one-day-only offer of a half-price ($4.49) burger and fries.
The $10 million to $25 million McDonald’s reportedly spends annually to be a World Cup sponsor is the proverbial double-edged sword. On the one hand, the Cup is one of the best events with which a brand can be associated. But for McDonald’s, the success of this year’s World Cup meant millions of people were at home, at bars or a Buffalo Wild Wings cheering throughout June. Not at McDonald’s.
McDonald’s made french fries the focus of its multi-million-dollar World Cup campaign.
How better to explain same-store sales for McDonald’s, which saw a 1.5% decline in comp sales for Q2 overall led by a 3.5% drop in June. McDonald’s Europe sales likely would have been positive in Q2 but for a sudden 3.4% drop in June. One analyst at today’s McDonald’s quarterly earnings call actually, embarrassingly asked, “Was there anything happening to explain the sales decline in Europe?” That analyst needs to spend less time dining at Balthazar and more time among the living because yes there was. No analyst asked a question about the World Cup during the call. That was good for McDonald’s since it hardly could blame poor sales on an event of which it is a global sponsor. CEO Don Thompson didn’t mention the World Cup; not even the global ad campaign supporting the event on which it spent millions.
Only Mark Kalinowski, restaurant analyst for Janney Montgomery Scott, had the smarts to wonder if the biggest global sporting event of the year might have had an impact on McDonald’s sales. As Kalinowski wrote in a brief to investors after McDonald’s quarterly report was issued, “Anything that keeps folks at home watching TV, keeps them away from their local McDonald’s restaurant. This may help explain the weaker-than-expected results in Europe and APMEA, in particular.”
The World Cup doesn’t explain away the frightening June decline in total, of course. Unfortunately, no analyst on today’s call asked about sales for the Bacon Clubhouse, the premium burger on which McDonald’s pinned its Q2 sales hopes. Comp sales were down for Q2 but was that because the Bacon Clubhouse underperformed expectations? We won’t know because analysts never ask such simple questions.
McDonald’s poor Q2 sales clearly put Thompson on the defensive. The mantra of the day was “moving with a sense of urgency.” He used it multiple times to indicate that he knows something’s very wrong. The usual response is to point to “a highly competitive environment and a contracting eating out market,” but that is especially unconvincing when you have Chipotle Mexican Grill reporting 17.3% same-store sales. Nothing contracting there.
The Bacon Clubhouse failed to keep McDonald’s from a declining customer count in Q2.
The conference call’s other key phrase was “foundational elements.” These are those building blocks of McDonald’s business—pricing, menu, operations, service, marketing—that will be strengthened under the two-path strategy Thompson outlined. The other path includes increasing customization, accelerating digital efforts and making McDonald’s “an even more respected brand” through ties to organizations such as World Wildlife Fund.
Thompson alluded to but didn’t elaborate on a “learning lab” he says the company has established in California to probe what consumers today want from McDonald’s. There were no analyst questions about the lab either, by the way. Thompson’s emphasis on the benefits of customization and personalization might mean an expansion of the build-your-own-burger option tested in California, or it may just be the expansion of condiment options that will be possible with the new High-Density Kitchen layout.
Why not try the “My Burger” promotion in the U.S. It worked in the UK in Q2.
At one point in the call Thompson said McDonald’s will “evaluate the relationship between pricing and quality perception.” That seemed to answer the concern voiced by a McDonald’s franchisee in Janney’s survey. “We still serve the most customers because we’re considered cheap, rather than the best quality,” said one franchisee. “We certainly have the best facility but we have to find a way to convince them that we offer the combination of service, quality, and cleanliness at the best value, not the cheapest.”
Thompson agreed that McDonald’s needs to reemphasize the quality of its food. But that won’t mean dropping the Dollar Menu & More. “We’re looking at the overall pricing on our menu board. But we’re not giving up on value or affordability,” he said.
Changing advertising creative also part of Thompson’s turnaround plan. He wants ads to focus on product quality and he wants to revive that “emotional connection” between brand and consumer that McDonald’s used to have.
If McDonald’s wants to improve consumer engagement with the brand, why doesn’t it try the “My Burger” promotion—where consumers suggest new burgers and the one with the most votes actually goes on the menu as an LTO—in the U.S.? The crowdsourcing approach was tried for the first time in the UK this spring and what happened? UK sales were among the best, globally, in Q2. Despite the World Cup.
You’ll recall that this spring when Motley Fool was running frantic headlines such as, “Look Out McDonald’s, Here Comes Taco Bell With Its Breakfast Menu,” BurgerBusiness.com was talking sense. I wrote that Yum! Brands CEO David Novak’s proclamation that “we’re in to win at breakfast” was a bit of sleight of hand because he was predicting only $100,000 in per-store incremental sales or about 7% of sales at breakfast. With victory defined so modestly (breakfast’s share is at least double that at every burger chain that sells breakfast), Taco Bell couldn’t help but “win.” But it sure wasn’t going to spell doom for the Arches.
McDonald’s Corp. reports its Q2 sales next week and even if they’re not pretty, Taco Bell shouldn’t claim victory. But it did, of course, just as predicted. Yesterday, Yum’s Novak called March 27, the day Taco Bell began selling breakfast, “a day that will go down in history.” That’s enough swagger to make you lose your breakfast, but there’s more.
“A day that will go down in history” Yum’s CEO calls it.
For Q2, Taco Bell reported a 2% gain in same-store sales—below the Consensus Metrix number of +3.6%—and a 1% gain in units. Most analysts called the numbers disappointing. Novak said they smelled like victory in the morning. “Our breakfast day part mix [is] around 7% of sales in the second quarter. We fully expect breakfast to be incremental and [bring] anywhere from $70,000 to $120,000 per unit in annualized sales,” Novak told analysts during a conference call. He added, “And for the long term there is no question we’ve enhanced our brand position as the choice of the new generation.” OK, but that new generation can turn on you faster than you can say “selfie.” He must have forgotten that many Millennials and others abandoned Taco Bell after the much-publicized lawsuit in 2011 questioning how much meat was in its tacos.
OK, so breakfast is a hit, Novak has declared. “Now the big question you’re probably asking is this: Given the success of the breakfast launch, why did same store-sales increase only 2% in the quarter?” he asked. And he had an answer ready: “Keep in mind that during the first two months of the quarter, our immediate emphasis was almost totally on breakfast. Once we returned to advertising our core business, it was with Cool Ranch Spicy Doritos Locos Tacos chicken. And frankly, this product underperformed versus our expectation.”
In other words, it spent so much time and money promoting breakfast—which won’t account for more than 7% of sales, compared with 25% of sales for McDonald’s—that sales for its more-important core menu suffered. But when it did promoe the core menu, their highly touted taco loco-doco LTO didn’t sell so well. If McDonald’s CEO Don Thompson offered that kind of convoluted explanation, Wall Street pundits and Motley Fool snarkers would be all over him. But that’s Novak’s explanation for Taco Bell’s underperformance.
“Our franchisees are in breakfast to win,” Novak said once again yesterday, adding that “they have been cheering us on to broaden our breakfast offerings with new products that we had already in the pipeline.” So they want new products that Taco Bell already had in development, such as new Grilled Breakfast Burritos. And Taco Bell also will be innovating with its core menu to drive business and will introduce mobile ordering, Novak said.
I’ll stand by what I said in April: Taco Bell’s breakfast will be a success because the chain has set the success bar so low. But McDonald’s, Burger King, Carl’s Jr., Jack in the Box and other QSRs don’t have to “look out” or panic. They’ll all be fine.
Despite the incessant chatter about “burger wars,” the competitor McDonald’s should be closely watching is neither Burger King nor Wendy’s but Chick-fil-A, according to an investor brief from Janney Montgomery Scott analyst Mark Kalinowski. He calls the chicken chain a “serious and growing competitive threat” to the largest QSR brand.
Chick-fil-A won’t top McDonald’s in total sales over the next decade, but Kalinowski argues that it may grow faster. “If Chick-fil-A can add $6.3-$9.0 billion to its systemwide sales over the next 10 years, it is entirely possible that this will be similar to—or worst-case, from McDonald’s perspective—greater than the systemwide sales that McDonald’s can add to its domestic business over that same time,” he writes.
Privately held Chick-fil-A had U.S. sales of $5.052 billion in 2013 (from 1,775 units), about triple its size in 2003. Publicly held McDonald’s dwarfed it with domestic sales of $35.856 billion (and 14,278 stores), and while its 47% increase since 2003 is solid, it doesn’t match Chick-fil-A’s growth, and certainly not the chicken chain’s 12.7% compound annual growth rate. Kalinowski says Chick-fil-A’s growth “was achieved through a balanced mix of unit expansion (which ranged annually from +3.2% to +6.2%, depending on the year) and consistently positive same-store sales growth.”
Kalinowski postulates several scenarios about future growth by both chains. Under what he calls Sensitivity Analysis #1 (positing 4.5% annualized unit growth and 4% annualized same-store sales growth), Chick-fil-A would rise to domestic sales of $11.4 billion in 2023. A second scenario—assuming 5% unit growth and 6% same-store sales growth)—grows Chick-fil-A to domestic sales of $14.3 billion in 2023.
“While Chick-fil-A remains meaningfully smaller than McDonald’s U.S. today, to the extent it could be ignored as a competitive threat ten years ago, we would argue that it can no longer be ignored as a long-term competitive threat today,” according to Kalinowski.
His scenarios for McDonald’s growth are far less confident. One, based on a 2.6% annual sales gain and just 0.6% unit growth, moves McDonald’s from an estimated $36.8 billion for 2014 to $46.3 billion in 2023. A second is even more dire, based on a 0.3% annual gain in both sales and units. Under that scenario, McDonald’s sales would grow less than 3% to $36.9 billion in 2023.
Chick-fil-A’s rapid rise from a distant No. 2 in chicken sales to the category leader, passing KFC, “may hint that it could become a larger competitive threat to many more fast-food brands over 2014 and beyond—and not just chains traditionally defined as ‘chicken’ brands,” Kalinowski writes. McDonald’s sells a lot of chicken, he notes, and it is the largest QSR brand so it has the most to lose by the continued ascent of Chick-fil-A. Kalinowski rates McDonald’s shares Neutral.
Sorry, Boston Market. This is NOT a burger.
Fast-casual chicken chain Boston Market wants to think it’s now taking on former owner McDonald’s and other burger concepts but really it’s going up against Panera and other upscale sandwich concepts.
Boston Market—which McDonald’s Corp. owned from 2000 to 2007—has announced the introduction of what it calls a BLT Rotisserie Chicken Burger as a limited-time offering through Aug. 24. The chain claimed it is “entering the ‘Burger Wars’” with this item, which is in no way a burger.
Instead Boston Market has put pulled rotisserie chicken and some burger toppings—thick-cut applewood-smoked bacon, bacon, lettuce, tomato and a roasted-garlic-avocado aïoli—on a burger-style sesame brioche bun. Putting it on a bun doesn’t make pulled chicken a burger.
What Boston Market has may be a bit like the BBQ, Bacon & Cheddar Smashchicken sandwich that Smashburger offers—although that is a solid breast patty—but it’s really closer to the Frontega Chicken Panini that Panera Bread menus. Either way, Boston Market’s sandwich is just not a burger
Boston Market’s pricing certainly separates it from all the QSR “better burger” concepts it wants to think it’s now competing with. The BLT Rotisserie Chicken Burger is $6.49 without the bacon; $6.99 with. A combo with drink and side is $9.48. That’s priced comparably with the Smashburger’s $6.99 Smashchicken sandwiches but well above QSR pricing. The new Big Chicken Fillet sandwich at Carl’s Jr. and Hardee’s is a 6-oz. chicken breast fillet sandwich for $3.99 alone or $6.49 for a combo.
Boston Market is the 8th largest chicken chain, according to Technomic. The No. 1 chain, Chick-fil-A, sells chicken sandwiches that are much closer to being burgers than is the BLT Rotisserie Chicken Burger. So really Boston Market simply is trying to catch up with the leader of its own category and is not really entering the burger arena at all.