The Burger Wars

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What is the best hamburger available for purchase?  It's a question that could drive some Americans to trade fisticuffs over their preferred brand, but by the numbers it has always been the beef and buns available on the McDonalds' menu, where the longstanding icon of grease and US culture sells 6.3 billion hamburgers around the globe per year, nearly enough for every man, woman, and child.  Their dominance at the top of the totem pole may not last, however, since their arch-rival Burger King has gained ground at a tremendous pace.  While McDonalds lost about 2.2% revenue through 2014, Burger King has done just the opposite, growing by 2.6%.  While their overall revenue still trails McDonalds by a rather significant margin -- $27.5 billion for the Golden Arches and just $4.4 billion for the King -- there's no doubt that investors look more favorably on the Whopper these days than the Big Mac.

The First Fast Food

The stories of Burger King and McDonalds' rise to the top could hardly be more different even though they both were founded in the 1950s and enjoyed strong growth in their markets.  Burger King changed ownership so many times during the past fifty years that the company struggled to develop cohesive business plans, more often marketing their product as superior to McDonalds (and thus giving their arch-rival free attention) than as a good burger in and of itself.  The failures of Burger King's leadership led to an aggressive takeover in 2002 by TPG Capital, raking in the company for a cool $1.5 billion.  By contrast, McDonalds went public nearly forty years earlier, giving Ronald and co. ample time to build up a consistent consumer base and expand their product onto nearly every mile of road in the United States.  McDonalds grew so large that the company's substitution of apple slices in their ubiquitous kids' meals made them the world's leading consumer of apples.  Burger King didn't get the breaks it needed by the 2008 financial crisis, furthermore, when the company lost so much money that they were de-listed from the New York Stock Exchange -- which they have yet to re-appear on. 

Changing Appetites

With the stage set for one brand to downright clobber the competition, much as Coke has been doing to Pepsi for the better part of a century, Burger King (BKC on the NASDAQ, trading for $35.85 a share) managed to draw a number of rabbits out of their hat.  The rise of a number of independent burger chains, highlighted by Five Guys, In-And-Out, and Smashburger, drew customers away from McDonalds as well as mainstay third-place fixtures Wendy's and White Castle.  These companies responded by changing up their menu, sometimes drastically -- McDonalds changed the breading on their McNuggets while White Castle began selling chicken in huge quantities -- but Burger King stood pat, doubling down on their food.  The conservative play proved the correct play: while a few new items proved popular, like the BK Chicken Fries, consumer interest in new fast-food meals with "superfoods" like spinach.  McDonalds' CEO Steve Easterbrook has said time and time again that he envisions turning McDonalds into a brand new dining experience despite the fact that this has never proven to be a success in the company's history.  Even a moderate change to the menu, such as the introduction of salads, did almost nothing to change the fast food experience: salads account for less than one percent of all sales at all fast food chains in the United States.  Despite the incredible irony that some of these salads have more calories than burgers due to the rich dressing, it's clear that Burger King has created a successful strategy of knowing itself and knowing its customer base. 

Less Is More

One further factor that plays into Burger King's growth lies in their simplicity.  The company has been eager to introduce new products to the lineup, but has taken out products at the same rate that they have come in.  You cannot, for instance, purchase a root beer smoothie at Burger King despite being able to do so just five years ago.  Clamping down on the menu makes sense in terms of retiring unpopular items, but also about removing the choices available to customers as well.  Though it seems counter-intuitive, hungry people don't like choices.  Restaurant studies show that menus with fewer than ten items sell more meals and result in higher customer satisfaction than menus overflowing with entrees and side dishes.  The bombardment of choices, as such, plays against the conventional thinking that customers want, in the words of Burger King's own commercials "to have it your way."  If the fast food giants want a truly radical experiment to boost their bottom line, perhaps they'll next change the menu to feature only a dozen or so items.

  • Burger King is currently on a recovery upswing from a poor performance over the past three months.  Investors who buy into the company's stock now will get the most benefit from the continued surge upwards.  The longer the wait to invest, the less value can be gleaned from a stock that's fresh from trading on three-month lows.  Unlike McDonalds stock, which has mostly stayed steady over the past year, Burger King appears to be capable of solid if unremarkable upward growth through the rest of 2015.
  • Projecting market share for fast food companies is notoriously difficult since few spending patterns dictate the flow of the market.  Don't think of Burger King stock as a long-term option for portfolio growth, because a new trend could upset the balance.  With relatively little news on the horizon for the industry, however, investors can expect the past six months to broadly mirror the next six months.
  • Similar "keep it simple" fast food chains like Sonic (SONC on the NASDAQ, trading for $28.65 a share) have also done well in the past six months.  A fast-food ETF or index fund won't capitalize on these specifics, so it's best not to invest broadly across different holdings.  Go for a specific stock and sell within a matter of months, if not weeks.

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