McDonald's: Following the Crowd

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

Everyday restaurants and coffee shops have mastered catering to lower and middle income people with their food and drinks, but what about their business model? Their food might not be the greatest, their coffee may not be the best, but they might be a better investment option than their products lead us to believe. 

McDonald’s (NYSE: MCD) is the world's largest fast food chain, having over 33,000 restaurants worldwide. With this type of size, comes a large amount of scrutiny. Recently, McDonald's has been under critique from the mainstream media and was even predicted that McDonald's would have Same Store Sales (SSS) declines in November. So, what did they do to try to avoid this, and did it work? McDonald's has mastered the concept of following other people's successes.

Their latest example of this is when they unraveled a one-time rollout of the Cheddar, Bacon, and Onion hamburger (CBO). Why? America has been in a bacon craze for quite some time - so they ceased an opportunity. The public shows an interest in bacon, so McDonald's meets the need. The results were outstanding.

Just as Wall Street was skeptical of McDonalds, predicting a decrease in SSS, McDonald's silences them showing a 2.4% increase for the month of November. Remember, SSS is a business term which refers to the difference in revenue generated by a retail chain's existing outlets over a certain period, compared to an identical period in the past, usually in the previous year. 

In the past, and still today, Starbucks (NASDAQ: SBUX) has created serious competition for McDonald's. Starbucks started selling premium coffee and people flocked to it. Again, McDonald's saw the need for coffee, and created a cheaper brand to sell for themselves. While Starbucks might charge $5 for a cup of coffee, McDonald's will provide coffee for half of that price, and people will buy from both companies. Some may buy from Starbucks because of the name or the quality, and some may buy from McDonald's because of the price and convenience, and some may buy from both.

Starbucks SSS were actually up almost 5% more than McDonald's in November, due to high traffic. So, does a "copy-cat" model for business work? Starbucks prides themselves on great service, an enjoyable atmosphere and great coffee. Generally speaking, McDonald's prides themselves on providing a cheaper product at a more convenient location. 

In the past five years, Panera (NASDAQ: PNRA) has performed the best, however Wendy's (NASDAQ: WEN) never recovered from a devastating 2008, when it plummeted over 80%! The chart below shows the past five years of results with these companies. 

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MCD data by YCharts

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MCD data by YCharts

Wendy's actually performed well in Q3 and for the short term is expected to grow. Even with 47 of its 6,543 stores nationwide being closed for remodeling, they still showed a 4.1% increase in sales. This was due in part to increases in prices. Wendy's did provide an adjusted EBITDA guidance for 2013 which implies a 4%-13% growth rate from this year's targeted range. 

Panera continued its growth with a remarkable Q3. Panera's SSS grew 6% even in the competitive restaurant industry. Virtually every area of Panera grew over the period of the quarter probably because of its new signature salads, an expanded hot sandwich platform, beverage extensions, as well as new breakfast offerings. 5%-6% growth is expected from the company in Q4 of this year. 

While it is obvious that a long term holder would be interested in Starbucks and Panera Bread, it will be interesting to see if these companies continue an upward trend in the short term. 

The bottom line...

McDonald's is the perfect example of a company that has its main line burgers that will never change, but are also very willing to adapt to the culture's demand. From coffee to bacon, if the people want it, they will provide it. These companies have found ways to maintain business, and continue to grow their companies. Businesses like Panera and Starbucks with a more original approach to their products, seem to outperform McDonald's and Wendy's, but don't underestimate the "copy-cat" system. Always keep your eye on the ones following the crowd!

tlwofford has no positions in the stocks mentioned above. The Motley Fool owns shares of McDonald's, Panera Bread, and Starbucks and has the following options: short JAN 2013 $47.00 puts on Starbucks. Motley Fool newsletter services recommend McDonald's, 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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