Will These Fast Food Chains Deliver?

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

McDonald's’(NYSE: MCD) latest earnings report was better in comparison to the same period last year, but the fast food giant’s slow growth can be a cause of concern. McDonald’s has always been a steady company, providing stable returns to its investors, but will it be able to sustain its growth? Let’s take a look.

Always trying to keep it conveniently valuable

McDonald’s has not changed much in its 60 years of business. Be it 1948 or 2012, the company’s low cost model has always been its charm. Moreover, with the launch of its dollar menu in 2002, it gained further recognition. The company’s main focus has been delivering value to its customers, as seen by the fact that it has only increased its prices by 2%, while the sector is experiencing an inflation of 2.5%.

The company is all set to launch “Fish McBites" as a limited-time addition in February. Fish McBites is expected to boost sales further, and will be launched in three sizes using Alaskan Pollock in its preparation.

Apart from value, another main focus of McDonald’s has been consumer convenience. The company’s drive-thru restaurants and extended hours of service have improved its image of being a convenient food destination. The company looks to invest $3.2 billion in 2013 to open new restaurants to expand its reach further. McDonald’s management has reaffirmed its resolve to open 2000 restaurants in China. This, I feel, is a confident step to reimage itself after it was reported to be selling expired chicken in China.

How well are its competitors placed?

McDonald’s faces a strong competition from Yum! Brands, (NYSE: YUM) the owner of KFC and Taco Bell. The revenue of Yum! has dropped a bit, as sales took a hit because of the Chinese Government’s recent public concerns over chicken antibiotics of KFC not meeting prescribed standards. I strongly feel the company will come out of this trouble in China soon.

Yum! is a very big brand in China and with the rebound in Chinese economy the company will be better placed than other fast food chains with its 4000 KFC restaurants and 700 Pizza Huts? Yum! is also making good capital investment and opening new restaurants outside U.S.A. It has opened over 1300 restaurants in the last two years and has a plan of spending $1 billion this year.  Taco Bell’s value meals’ competition with McDonald’s value meals has pushed McDonald’s to lower prices, affecting its profits.

Food inflation is no doubt affecting the entire industry, but Chipotle (NYSE: CMG) seems to be better placed than others in combating it. The company has a loyal set of customers and as the food is priced comparatively higher than its competitors, it can pass on the increased cost to them with ease. Chipotle is also moving into catering service which shall start in all of its outlets in 2013, which will further open new avenues and sources of revenue for the company.

The trend of dining at fast casual places rather than traditional restaurants will help Chipotle further in its growth prospects. The company, I feel, is taking the best from all its peers and making it more competitive to provide tremendous returns in the future.

Foolish conclusion

All the companies in this article have a story of their own. McDonald’s is a mature company, with over 62 million daily customers, should provide stability to an investor’s portfolio. Yum! Brands, no doubt is in some trouble, but it should be short-lived and the company would be back delivering strong results. The company is well placed with over 4000 restaurants in China, the second largest growing economy.

Chipotle seems to be a bet on the future. With its strategies well placed, it is the only company that can capitalize on any change that comes in the fast food industry. Now it’s entirely up to an investor what he wants to bet on. Is it stability, or good placement in emerging markets, or the future growth prospects of a company?


vrindakedia has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and McDonald's. The Motley Fool owns shares of 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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