Fast-food chains are gaining muscle again

February 23, 2016
JONATHAN BERR
MONEYWATCH
February 17, 2016
http://www.cbsnews.com/news/fast-food-chains-mcdonalds-burger-king-wendys-gaining-muscle-again/

McDonald’s (MCD), Burger King and Wendy’s (WEN), which have struggled in recent years, are now dishing up some appetizing operating results.

Same-store sales, a key metric of sales at locations open a year or more, have been on an upswing for the big chains recently. For instance, that figure has risen 5.7 percent at McDonald’s over the past 13 months, by 3.9 percent at Burger King over the 2015’s last quarter and by 4.8 percent for Wendy’s in the same period.

According to Darren Tristano, president of restaurant consulting firm Technomic, consumers are spending more at the chains, thanks to lower gas prices and an improving job market. The companies are also selling their food more aggressively to budget-conscious diners, a key demographic for the industry.

“With so much advertising shifted toward value play, $4 for 4, $2 for 2, etc … low prices are driving consumers toward convenience, value and comfort food,” he said, adding that renovations at the chains have also paid off. “Locations are becoming more appealing to consumers, who have viewed these restaurants as old and outdated.”

Burger King parent Restaurant Brands International (QSR) benefited from remodeling the burger restaurants and the expansion of the Tim Horton’s donut shop chain, which it also now owns. During yesterday’s earnings conference call, the company said U.S. franchisee profitability rose by more than 30 percent over last year, which CEO Daniel Schwartz called a “tremendous accomplishment.” Franchisees, who are independent business operators, own many fast-food restaurants.

Restaurant Brands has high hopes for an American classic: Grilled hot dogs, which Burger King is rolling out at more than 7,000 U.S. locations later this month. It may be chain’s largest new product launch since the 1970s.

“I personally visited the test market to confirm that the Grilled Dogs could be an operationally simple but pretty impactful product,” Schwartz said during the conference call. “And we’re all excited about it.”

Restaurant Brands was created in 2014 after the $11 billion acquisition of Tim Horton’s by Burger King Worldwide, which is controlled by Brazil’s 3G Capital. The transaction, called an inversion, lowered the company’s tax bill because it relocated to Canada, and it remains controversial.

Restaurant Brands on Tuesday reported better-than-expected profit, excluding one-time items, of 35 cents per share on revenue of $1.06 billion. Same-store sales rose by 6.3 percent at Tim Horton’s.

Wall Street, though, remains skeptical. Shares of Restaurant Brands have slumped more than 18 percent over the past year, underperforming McDonald’s, which gained more than 23 percent during that same time amid investors’ enthusiasm of a potential turnaround at the Home of the Golden Arches.

Morningstar analyst R.J. Hottovy, however, argued in a recent note that investors were overlooking Restaurant Brands’ potential for growth.

“While McDonald’s turnaround may have generated the most quick-service-restaurant headlines the past several months … Restaurant Brands International continues to fly under the radar with effective menu strategies, new franchise partnerships across the globe and exceptional cost discipline,” he wrote.

Earlier this year, McDonald’s reported its strongest quarterly earnings in nearly four years as consumers responded to the chain’s decision to offer breakfast all day. Wendy’s results beat Wall Street’s analysts’ expectations, and the chain forecast better-than-expected sales at existing locations in 2016.

Other fast food chains are also doing well.

Yum Brands (YUM), the parent of Taco Bell and KFC, recently reported better-than-expected quarterly profit, though revenue growth was hurt by the sluggish performance at Pizza Hut.

Popeyes Louisiana Kitchen (PLKI) announced in January that it expected 2015 per-share earnings to be better than it had previously forecast. It plans to release results on Feb. 23.

If the industry keeps this momentum going, investors may soon start ordering more fast-food shares.


McDonald’s reaps the benefit of all day breakfasts and table service

February 9, 2016

McDonald's signature rangeEven though we’re only into its second month, 2016 been rather a good year for Steve Easterbrook, McDonald’s chief executive. His football team, Watford, is enjoying its best season in years and much the same can be said for the US fast-food giant.

The company surprised analysts with its latest quarterly results last week, with sales up 5.7pc in the US – nearly twice as much as had been predicted. Global sales are up by 5pc.

It has taken a Briton – albeit one steeped in McDonald’s corporate culture – to revive the most American of institutions, which was in danger of being left behind by rather nimbler competitors in the fast food industry.

From introducing all-day breakfasts throughout the US to testing waiter service at some of its outlets, including in the UK, Easterbrook has overhauled how the company operates at a bewildering pace.

The chain was in something of a mess when Easterbrook took over as chief executive in March 2015. Last August, for the first time in more than 45 years, McDonald’s announced that it was closing more outlets than it was opening.

European sales had dropped by 1.4pc, between 2008-14. In the US, the decline was 3.3pc and in Asia, the Middle East and Africa, once considered a growth region, a rather frightening 9.9pc.

It was not just the dire figures which suggested that McDonald’s was in need of a cultural shift. The company was facing competition from not only its traditional rivals, such as Burger King and Wendy’s, but also from hipper new competitors entering the market, such as Honest, Byron, Five Guys and Shake Shack.

It was pretty clear that the golden arches had lost their sparkle. Within weeks of taking over the reins, Easterbrook appeared on CBS’s This Morning television progamme in the US to signal that the 60-year-old company was in for a radical overhaul.

“We really want to assert McDonald’s as a modern burger company. To do that you have to make meaningful changes in the business,” he said. “The pace of change outside McDonald’s has been a little quicker than the pace of change within. You act your way to success, you can’t talk your way to success.”

For once, this was not empty corporate-speak. All-day breakfasts were tested in San Diego in April, and within months were available at all the company’s 16,000 US restaurants. This has brought back customers who might have gone elsewhere and even tempted in newcomers.

Other changes have seen the introduction of a “McPick menu” where US customers can have two items for only $2, despite the wafer-thin profit margin the deal provides.

The range of burgers has also been increased to include Pico Guacamole and Buffalo Bacon, and diners are now being allowed to customise their burgers. McDonald’s has also launched its first loyalty programme for people who register their details, offering, for example, a free cup of coffee for every five bought at one of its restaurants.

Easterbrook has also done something to improve McDonald’s corporate image, announcing a 10pc pay rise for the 90,000 people who work in outlets directly owned by the company in the US. This has taken their hourly minimum wage to $9.90 an hour – increasing to more than $10 this year – considerably higher than the legal minimum of $7.95.

The one caveat, however, was that the pay rise was limited to those staff who work for the 10pc of restaurants which are owned by the company rather than franchisees. Even the white packaging is being ditched after more than a decade. Instead, food now comes in brown paper bags which, in theory, are seen as more environmentally friendly.

According to a company spokesman, the change is “consistent with our vision to be a modern and progressive burger company” –a phrase now something of a corporate mantra.

“One of the things Easterbrook has done is create a sense of urgency in the the McDonald’s business culture,” said Mark Kalinowski, a restaurant analyst at Nomura in New York. “When the company started trialling the all-day breakfast in San Diego county in April, it only took until October before it went nationwide.

“He doesn’t want to waste time, he operates on speed to market and saw it was clearly something customers wanted.

“For McDonald’s, that is rather quick. Although it can be innovative, the company is traditionally slow- moving. I think it’s a reflection on its sheer size.” Even though Easterbrook has spent much of his career with McDonald’s, having joined in 1993, he also spent time with the rather more upmarket Wagamama and Pizza Express chains. He returned to McDonald’s in 2013 as chief brand officer, having held previous roles including its head of Europe.

“Most of the presidents and chief executives at McDonald’s we have seen have been promoted from within. Having somebody with an outside perspective is exactly what the company needed” said Darren Tristano, president of Technomic, a Chicago-based company specialising in the food industry.

Tristano believes that Easterbrook’s strategy has been shrewd. “He has aggressively marketed the all-day breakfast, which has put McDonald’s back at the top of the mind of consumers.

“The price point appeals to lower and middle-income consumers who are looking for something which is less expensive than the dinner menu. This has helped McDonald’s get back some of the market share which it had been losing to rivals.”

McDonald’s has also been helped by the rehabilitation of the egg in the mind of the consumer, Tristano added.

“If you go back a few years, eggs were seen as high-cholesterol. Now they are seen as high-protein and eggs are a key part of breakfast.

“The sales growth on a year over year basis is over a few years of weak sales performance, so the numbers are good but we should expect to see sustainable growth and especially year over year, fourth quarter 2016 would signal McDonald’s is officially back.

“McDonald’s appears to be listening to their customers and staying more true to their brand under Easterbrook.”

The consensus appears to that Easterbrook has enabled McDonald’s to regain its mojo. “He has brought a sense of strategic clarity, said John Quelch, professor of marketing at Harvard Business School.

“There is a tendency when a company gets into trouble to sling products at the wall and see what sticks. All that does is adds complexity. If you reach a point when you can’t explain to an employee or a franchisee what the point of a product is, then how can you expect them to explain that to a customer?

“The bench strength of McDonald’s is enormously good. It is no surprise that they were able to find somebody like him to step up,” added Quelch.