When McDonald’s Corporation (NYSE:MCD) introduced its “all-day breakfast” menu option, the response was pure joy for MCD stock and absolute terror for competing fast-food stocks. In a bid to address lagging sales, the “Golden arches” decided to raise the stakes. In doing so, McDonald’s went from a stock struggling to find momentum to suddenly becoming a three-digit ticket.
Best of all, MCD didn’t have to wait at all. As Time noted, “Almost immediately, McDonald’s saw how much all day breakfast moved the needle: The new menu options attracted customers who wouldn’t normally eat at McDonald’s, and sales rose sharply in the fourth quarter of 2015 and on into 2016.” Rival fast-food stocks were caught flat-footed, and responded with menu expansions of their own.
Unfortunately for MCD, the thrill has clearly worn off. Although the iconic burger joint beat earnings estimates for its most recent fourth-quarter outing, the markets were unimpressed. The sales boost from all-day breakfast was a one-off event. As a result, McDonald’s slipped in the markets on Monday, shedding nearly 1% from the prior session.
Even more ominous, from mid-November of last year, MCD appears to be forming a bearish head-and-shoulders pattern.
Now, McDonald’s executives are looking for answers. One possible solution is a home delivery service. In fact, CEO Steve Easterbrook stated that they are in the “very, very early stages” of testing the concept in Florida.
Why not? Florida is home to stupid ideas like pet alligators and the butterfly ballot. So I’m sure that there’s going to be takers on the delivery concept. But taking the advice of an eccentric state and applying it to the rest of the nation could be a big mistake.
This should be of zero comfort to fast-food stocks. For one thing, the overall industry hasn’t gotten off to the best start in 2017. Primarily, however, if MCD is having trouble ginning up viable ideas for its sales woes, I’m not sure other fast-food stocks will fare much better.
This is a tough, crowded market, and it might get worse from here on out. Here are three fast-food stocks that are sweating bullets because of McDonald’s.
Fast-Food Stocks on Alert: Jack in the Box (JACK)
Compared to other fast-food stocks, Jack in the Box Inc. (NASDAQ:JACK) has become the anti-McDonald’s. While MCD is proud of their family friendly heritage thanks to memorable brands like “Ronald McDonald,” JACK has more of a rougher, adult edge. Recent commercials run by MCD tug at the heartstrings. Many of JACK’s commercials tug at something else. From a pure marketing perspective, it’s a brilliant way to differentiate products.
To be fair, this change was necessitated by extremely regrettable and tragic incidents involving food safety. While many parents often worry about the health repercussions of their kids eating at McDonald’s, JACK gave them a darn good reason to.
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Today, however, the challenge is what to do when all the good news is priced in for fast-food stocks. One of the damning criticisms of MCD is that they lack “a clear forward strategy of driving customer traffic,” according to Conlumino retail analyst Neil Saunders. There’s only so many all-day breakfast and 24/7 drive-thru options you can give to people before it becomes blasé.
And in the case of JACK, there’s only so many times you can be the anti-McDonald’s before you are forced to forge an independently unique image.
Fast-Food Stocks on Alert: Shake Shack (SHAK)
Under Wikipedia‘s entry for Shake Shack Inc (NYSE:SHAK), the free encyclopedia defines the company as a fast casual restaurant chain. They also imply that SHAK is still a Wall Street darling.
Let’s correct the former first. There’s nothing “fast casual” about SHAK. Until the day cheeseburgers, hot dogs, crinkle-cut French fries and chocolate milk shakes cause you to lose weight, SHAK belongs under fast-food stocks — I don’t care how it’s packaged!
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Unfortunately, those days are over. At the time of this writing, SHAK stock stood at $34.49, down more than 64% against its all-time high.
True, technicals aren’t the only barometer by which to judge an investment. Still, we’re talking about a stock that has gone sideways for the trailing year. And by sideways, I mean that Shake Shack’s price chart looks like a seismograph reading. Obviously, traders are having difficulty assessing the company’s true worth in light of so many similar competitors. That dynamic is not made easier by the troubles facing fast-food stocks.
Although it may be a trendy concept, the competitive landscape is too saturated for SHAK to stand out.
Fast-Food Stocks on Alert: Chipotle Mexican Grill (CMG)
Among fast-food stocks, Chipotle Mexican Grill, Inc. (NYSE:CMG) most resembles a double-edged sword. Prior to its food safety crisis, CMG won the battle of perception. It wasn’t that their food was all that nutritious, despite ousting Subway from its “healthy” throne. In fact, studies showed that, on average, CMG customers consumed over a thousand calories. That’s more than a typical meal at McDonald’s.
None of it mattered at the time because CMG convinced their core Millennial audience that they were healthy. In Millennial world, if you assert something long enough and strong enough, it must be true.
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I’m not saying it’s impossible for CMG to recover. Jack in the Box certainly did, and they dealt with a body count. The overriding dilemma, though, is that for CMG to recoup its losses, it will cost them big time. While they’re running margin-killing promotions, they’ll have to endure industry-wide headwinds like food price deflation.
In this wacky world of ours, CMG could end up being the comeback story of 2017. However, finding willing gamblers is a different story.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
