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Jan. 29, 2020, 6:58 a.m. EST

McDonald’s earnings preview: Chick-fil-A is the fast-food giant’s biggest competition in the U.S.

McDonald’s needs a new chicken menu item, and fast, franchisees say

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By Tonya Garcia, MarketWatch


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McDonald’s has relied on its core menu, including the Quarter Pounder, rather than lots of menu innovation

Rather than “Where’s the beef?,” a lot of McDonald’s Corp. franchisees are asking “Where’s the chicken?”

The fast-food giant has largely sat out the chicken sandwich wars, with key players including privately-held Chick-fil-A, Wendy’s Co. /zigman2/quotes/204070192/composite WEN +1.66%   and Restaurant Brands International Inc.’s /zigman2/quotes/202094900/composite QSR +1.16%  Popeyes Louisiana Kitchen.

Data compiled by Kalinowski Equity Research shows franchisees are concerned that McDonald’s /zigman2/quotes/203508018/composite MCD +0.30%   is missing a sales opportunity.

Read: Chicken sandwich wars: Popeyes, Chick-fil-A and Wendy’s are waging an all-out food fight on Twitter

“They lack a truly high-quality chicken sandwich to compete with Chick-fil-A, which is McDonald’s most important competitive threat in the U.S.,” said Mark Kalinowski, chief executive of the research firm

McDonald’s is scheduled to announced fourth-quarter earnings on Wednesday before the opening bell.

Kalinowski Equity Research polled McDonald’s franchisees for a two-part January report, with the second section focused on the question of which competitor McDonald’s is losing market share to. Nearly nine out of 10 (89%) said Chick-fil-A.

“This opportunity is tremendous,” said one franchisee. “We have to get a sandwich that matches our competitors’ taste and quality.”

Another said McDonald’s should simply take a winning recipe from the competition.

“The opportunity is huge,” said this franchisee. “We should shamelessly copy Popeyes’ excellent sandwich.”

Another expressed doubt that McDonald’s can keep up.

“The real question is, can we compete with Chick-fil-A? I don’t think so,” said one franchisee.


Dow Jones Market Data Group

Chick-fil-A was the third biggest U.S. restaurant concept at the end of 2019, according to domestic systemwide sales, Kalinowski said in its report.

“With a lot of whitespace in the Midwest and Northeast, Chick-fil-A’s unit expansion is likely to remain robust for years to come,” the report says.

As for Popeyes, that chain was only the 25th largest at the end of 2018, and even if it were to grow by half, the market share gain would be 0.9%, according to Kalinowski.

“So although Popeyes is to be applauded for its massive chicken sandwich success, that success – in context – suggests minimal/immaterial competitive impact on McDonald’s,” the report said.

For franchisees, the issue is simple.

“The opportunity is tremendous,” said one franchisee. “We have to get a sandwich that matches our competitors’ taste and quality.”

Kalinowski upgraded McDonald’s to buy from neutral on Wednesday, with a $240 price target. McDonald’s has an average overweight stock rating and average target price of $225.62, according to 33 analysts polled by FactSet.

One issue is the slow speed at which McDonald’s adds items or changes its menu. Both Kalinowski and Adam Werner, co-leader of the restaurant, hospitality and leisure practice at AlixPartners, call McDonald’s a “fast follower” rather than a leader in fast-food menu innovation.

Kalinowski supports a more conservative approach, in light of past missteps like the Fish McBites. Instead, McDonald’s has focused on improvements to its core items, like making the popular Quarter Pounder with fresh beef.

But Werner, like franchisees, doesn’t think the chicken sandwich wars are going to end anytime soon, so McDonald’s will need to do something to participate.

/zigman2/quotes/204070192/composite
US : U.S.: Nasdaq
$ 21.99
+0.36 +1.66%
Volume: 1.52M
July 10, 2020 4:00p
P/E Ratio
43.09
Dividend Yield
0.91%
Market Cap
$4.82 billion
Rev. per Employee
$131,400
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/zigman2/quotes/202094900/composite
US : U.S.: NYSE
$ 55.05
+0.63 +1.16%
Volume: 878,323
July 10, 2020 4:00p
P/E Ratio
23.77
Dividend Yield
3.78%
Market Cap
$25.30 billion
Rev. per Employee
$892,833
loading...
/zigman2/quotes/203508018/composite
US : U.S.: NYSE
$ 184.88
+0.55 +0.30%
Volume: 2.71M
July 10, 2020 4:00p
P/E Ratio
24.22
Dividend Yield
2.70%
Market Cap
$137.06 billion
Rev. per Employee
$100,120
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