On the Margin
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McDonald's comeback hits smaller chains hardest

Blog: Recent same-store sales results show industry is a zero-sum game

This post is part of the On the Margin blog.

McDonald’s Corp. same-store sales declines between 2013 and 2015 may have been a boon to the chain’s competitors, but now its recovery poses a problem for them.

The Oak Brook, Ill.-based burger giant's results, at least in recent years, have had a bigger impact on its smaller competitors, such as Sonic Corp., Jack in the Box and Steak ‘n Shake, than it has had on Burger King and Wendy’s.

Nevertheless, it demonstrates something that many industry experts have been saying for some time: The industry is a zero-sum game at the moment, with too many locations and too little demand. That’s had a big influence on weak industry traffic in recent years.

Companies “built a lot of restaurants after the recession as things started improving,” Larry Miller, cofounder of the MillerPulse survey, told me this week. “Demand was never that strong when you built those units. Now you’ve seen regression toward the mean. That’s going to take some time to work itself out.”

As you can see from the below graphic, there’s a correlation between McDonald’s performance and the performance of its direct competitors. 

More simplistically, McDonald’s same-store sales averaged a decline of 1.37 percent from the first quarter of 2013 through the third quarter of 2015. Its fast-food burger competitors’ same-store sales averaged a 3 percent increase during corresponding quarters.

In the quarters since, McDonald’s same-store sales averaged 2.6 percent. Rivals’ same-store sales increased 0.73 percent.

To be sure, these are same-store sales, which are imperfect. Unit count could influence these numbers. And traffic would be a better indicator of shifts in consumers. 

On top of that, these numbers do not include private chains, convenience stores or fast-casual burger chains, all of which are likely influencing quick-service sales.

We like analyzing fast food burger chains because their customers have little loyalty, and the industry is as saturated as any other out there. Plus, it has the industry’s single, most dominant competitor — making the overall results unsurprising.

McDonald’s is a giant chain, with 14,000 locations that average about $2.5 million in sales. It has a huge impact on the overall restaurant market. It has the best-known brand in the restaurant business and enjoys immense marketing power. Of course it influences sales.

What’s a bit more surprising is that its biggest competitors, Wendy’s and Burger King, have done a better job of withstanding McDonald’s sales swings than have the smaller, publicly traded players. Their strength, in fact, might be keeping McDonald’s from even better performances.

From 2013 through 2015, when McDonald’s sales fell by 1.37 percent, Burger King and Wendy’s averaged just over a 2-percent increase in same-store sales. Sonic, Jack in the Box and Steak ‘n Shake averaged a 3.69 percent increase. So the smaller chains seemed to have benefited more from McDonald’s weakness.

And they fell harder, too. Since then, those three smaller chains have averaged a 0.01 percent increase, while Burger King and Wendy’s same-store sales were little changed — up 1.82 percent.

Wendy’s and Burger King have more marketing power than the other chains and in recent years have been aggressive in offering discounts to pull in traffic. They have also remodeled restaurants, which improves same-store sales. That has likely helped them compete with their larger rival.

We’re only talking one sector here, of course. Other sectors are able to generate more organic growth, or they’re losing more customers, overall.

But the conclusion is the same: Growth in 2017 comes at the expense of someone else. Absent some external event that gets everybody spending again and makes the business all the easier, this is likely to continue. 

Chains can overcome this, however, through savvy and aggressive marketing, capital spending and maybe a little luck.

Jonathan Maze, Nation’s Restaurant News senior financial editor, does not directly own stock or interest in a restaurant company. 

Contact Jonathan Maze at [email protected]

Follow him on Twitter: @jonathanmaze

TAGS: Sales Trends
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