Fast Food Product Innovation: A Key to Success

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

When you think about fast food, you probably don't associate product innovation with any of the prominent industry participants. This is understandable since innovation is more often thought of as a technology cornerstone. However, fast food, like toothpaste, requires constant change in order for a company to stay relevant. Dow-30 giant McDonald's (NYSE: MCD) is a clear innovation leader, but other players haven't missed the importance of “new,” either.

Taking the Lead
McDonald's went through a rough patch about a decade ago when management appeared to lose its way. The problem was that not enough was new or changing. Since that time, however, McDonald's has made change an almost constant effort. It was the first fast food chain that tried fancy coffee, taking a cue from the impressive demand coffee-giant Starbucks (NASDAQ: SBUX) was seeing. That simple change has proven to be a huge success that others have attempted to follow.

Coffee, however, wasn't the only thing McDonald's added. It also brought out salads to appeal to the healthy lifestyle trend and higher-end burgers, spurred by the new crop of higher quality dedicated burger shops popping up across the landscape. And these are just a couple of examples of what the burger giant has done of late.

An Also Ran Teaches the Giant a Lesson
In addition to these new products, McDonald's has been working hard to keep its menu fresh. Although the core stays fairly constant, there are now new food items brought out on a regular basis and some that are seasonal. This was one of the keys to Wendy's (NASDAQ: WEN) former success, sadly a long distant memory for the struggling company. For anyone old enough to remember that company's heyday, Wendy's spicy chicken sandwich always seemed to be returning to entice customers back into its stores. McDonald's is doing the same thing now, but seems to be doing a better job of it.

Other Fast Food Joints Play Follow the Leader
McDonald's isn't the only company playing this game, though it is probably doing it best. For example, Burger King, after yet another attempt at a turnaround, has brought out a collection of salads that are on par, if not better, than those offered by McDonald's. It also has fancy coffees and special deserts (bacon ice cream sundae anyone?). While Burger King has for years seemed to be in a constant state of turmoil, following along the “new” track may actually solidify its core customer base and help to make this refresh stick.

Yum Brands' (NYSE: YUM) Taco Bell has also been getting in on the act. While the company doesn't have to take on McDonald's, it realized that a static menu meant lagging sales. It has been bringing out new versions of old favorites for several years to great success. Now, it is attempting to get into a food category that has alluded it for a long time, desert. While some people might love the company's cinnamon twist desert, the success of the company's empanada foray has resulted in Taco Bell launching a few new deserts, including a version of a churro.

Competition Can Do Wonders
While the new deserts may not make or break the company's top line, they will likely increase the average spend per customer as a former weakness becomes at least on par with other fast food companies' offerings. Another area that Taco Bell is working on is quality, an attribute that isn't often associated with the company's food. However, after former McDonald's holding Chipotle Mexican Grill (NYSE: CMG) came along with its higher-end Mexican fare, Taco Bell realized it had to innovate to compete. Unable to provide the same variety as Chipotle because of the differences in their business models, Taco Bell has introduced a collection of pre-set, higher quality meals that mimic those offered by Chipotle.

Another Avenue of Change, with More Risk
Chipotle was one of a small number of new entrants that upset the quick service Mexican food market, which previously consisted largely of Taco Bell and mom and pop shops. Now it is looking at the Chinese food market, which is basically all mom and pop shops. However, creating new brands from scratch is expensive and difficult. So the company's ShopHouse Southeast Asian Kitchen concept could be a huge hit or a massive flop.

Chipotle, though, is taking what it does best and applying it to Asian fare, so it stands a good chance of a positive outcome. Indeed, the same assembly line model that is used for Mexican food is the underpinning of this new Asian concept. It is a fresh look at an old food category. However, it could also distract management from its core brand, which is the big risk in such endeavors.

Part of McDonald's malaise was the result of management focusing more on other projects than on its core brand. After sending Chipotle and a few others packing, the burger giant got its stride back. Still, Yum brands proves that a company can succeed with more than one concept, if management knows what it is doing. Still, the ill-fated, and now reversed, merger between Arby's and Wendy's suggests that some aren't capable of successfully doing more than one thing at a time. So carefully monitoring such new concepts is important for investors.

Yours,


ReubenGBrewer has no positions in the stocks mentioned above. The Motley Fool owns shares of Chipotle Mexican Grill and McDonald's. Motley Fool newsletter services recommend Burger King Worldwide, Chipotle Mexican Grill, and McDonald's. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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