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In fast food wars, scale matters

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Scale matters, and the fast-food chains that have it may be able to take market share by attracting value-conscious consumers.

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In fast food wars, scale matters

  1. In fast food wars, scale matters Michael Halen, Jennifer Bartashus Bloomberg Intelligence analysts
  2. McDonald’s, Burger King have scale to win fast-food price wars
  3. As price competition heats up in the fast-food industry, the largest chains, including McDonald’s, Restaurant Brands and Yum! Brands can source ingredients most cheaply and offer customers the lowest prices. Scale matters, and the chains that have it may be able to take market share by attracting value-conscious consumers. On an earnings call last week, Jack in the Box’s CEO said the company’s discounts will get significantly more aggressive and other smaller chains, such as Popeyes and Sonic, may soon follow suit.
  4. McDonald’s breakfast may stymie share gains for smaller chains
  5. McDonald’s aggressive discounting and all-day breakfast boosted U.S. same-store sales in 2H15, stalling market-share losses ceded to smaller quick-service chains since 2013. Sonic, Jack in the Box and Popeyes’ strong same-store sales gains in 2013-15 outpaced the five-year industry average of 3%. Broader initiatives, including improved service, mobile, quality perception and a more focused menu are designed to help McDonald’s reconnect with customers and establish longer-term sales growth.
  6. Fast-Food Same-Store Sales
  7. Fast-food discount war chases least loyal customers to add sales
  8. Historically, the descent into a value war does little to aid highly-franchised restaurant operators, such as Burger King and Yum’s U.S. operations. If prices get too low, or are sustained for too long a time, franchisee profitability begins to wane, and can create larger operational issues. Chains such as McDonald’s and Wendy’s are actively shifting to more franchised models. Deep discounts can create short-term traffic boosts of the least loyal customers -- those seeking the cheapest deals.
  9. % of Fast-Food Company-Operated Locations
  10. Sonic, Bojangles need to focus on value perception beyond price
  11. Smaller, regional restaurant chains including Sonic, Popeyes, Bojangles, Del Taco and Jack in the Box may be forced into an unprofitable value-meal focus to compete with national chains, which could erode restaurant-level margins. To offset this pressure, messages around quality ingredients, customization, preparation and brand uniqueness are components that may help smaller chains increase value perception beyond the dollar sign, making it easier to defend market share.
  12. Fast-Food Restaurant-Level Margins
  13. Quick-service promotions may force Popeyes and Sonic to discount
  14. A protracted quick-service industry price war could pressure traffic and sales at Sonic and Popeyes, forcing the chains to increase promotions or risk losing market share. Sonic has said it’s comfortable with the strong value on its menu and that its unique product offering lets the chain compete with McDonald’s and Burger King without increasing discounts. Popeyes said it doesn’t want to overreact to the promotional activity, but is developing contingencies should the discounting persist.
  15. Popeyes & Sonic Same-Store Sales
  16. Bloomberg Intelligence offers valuable insight and company data, interactive charting and written analysis with government, credit insights from a team of independent experts, giving trading and investment professionals deep insight into where crucial industries start today and where they may be heading next.

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