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In-N-Out Burger Can Teach Fast Food Stocks a Lesson (MCD, BKC, WEN, YUM)


Fast-food heavyweights such as McDonald’s (MCD), Burger King (BKC), Wendy’s/Arby’s Group (WEN) and Yum! Brands (YUM) stores Taco Bell and KFC have long made a practice of juicing earnings and sales with short-term promotions. But these restaurant stocks could learn a thing or two from In-N-Out Burger, a privately held West Coast fast-food chain with a rabid and almost cult-like following.

The chain has been slow to expand beyond California, but the In-N-Out philosophy has also resulted in unmatched popularity that has current locations swamped. The only thing to do is open more stores — including a rumored expansion into Dallas, Texas, in what would be a huge reach east for the chain.

This should have McDonald’s, Burger King, Wendy’s and Yum! Brands all sweating – and not just because there’s another company setting up shop in their markets. The fact is that In-N-Out is seeing booming growth due to its business model and corporate philosophy at a time BK is losing momentum day by day.

Consider some of these recent fads from MCD, BKC, WEN and YUM in pursuit of an instant sales jump:

But on a basic level these are just gimmicks and not a change in the way BK does business, which means if these efforts fail the stock could slump further. As McDonald’s  and Burger King fight a promotion war over summer drinks, coffee and everything else, it has to be acknowledged that there is always a loser in short-sighted battles for taste.

The big loser lately has been Burger King. BKC reported fiscal third-quarter earnings results showing profits sank 13% year-over-year. To top it off, Burger King’s same-store sales — the gold standard for the health of its business — fell 3.7% in fiscal Q3. Clearly whatever Burger King execs are doing isn’t working.

In-N-Out is a bit of an anomaly in today’s fast-paced fast food world, but could teach BK a thing or two about propping up its sales. The company focuses on fresh ingredients, and cuts is french fries every day before dipping them in hot oil to order. It also treats its staff as valued employees and not just more part-time meat for the grinder. In-N-Out actually pays its employees significantly more than state and federally-mandated minimum wages.

Those aren’t exactly ideas Burger King is going to embrace any time soon. Instead, the company is focusing more on fads as it chases an instant uptick in sales. But whether these gimmicks work doesn’t change the fact that customer loyalty is worth a heck of a lot more than a bright idea that boosts revenue in the short term.

As of this writing, Jeff Reeves did not own shares in any of the companies named here.

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