Scale matters, and the fast-food chains that have it may be able to take market share by attracting value-conscious consumers.

1. In fast food wars,
scale matters
Michael Halen, Jennifer Bartashus
Bloomberg Intelligence analysts

2. McDonald’s, Burger King have scale to win
fast-food price wars

3. As price competition heats up in the fast-food industry, the largest
chains, including McDonald’s, Restaurant Brands and Yum!
Brands can source ingredients most cheaply and offer customers
the lowest prices.
Scale matters, and the chains that have it may be able to take
market share by attracting value-conscious consumers. On an
earnings call last week, Jack in the Box’s CEO said the company’s
discounts will get significantly more aggressive and other smaller
chains, such as Popeyes and Sonic, may soon follow suit.

4. McDonald’s breakfast may stymie share gains
for smaller chains

5. McDonald’s aggressive discounting and all-day breakfast boosted
U.S. same-store sales in 2H15, stalling market-share losses ceded to
smaller quick-service chains since 2013. Sonic, Jack in the Box and
Popeyes’ strong same-store sales gains in 2013-15 outpaced the
five-year industry average of 3%.
Broader initiatives, including improved service, mobile, quality
perception and a more focused menu are designed to help
McDonald’s reconnect with customers and establish longer-term
sales growth.

6. Fast-Food Same-Store Sales

7. Fast-food discount war chases least loyal customers to add sales

8. Historically, the descent into a value war does little to aid
highly-franchised restaurant operators, such as Burger King and
Yum’s U.S. operations. If prices get too low, or are sustained for
too long a time, franchisee profitability begins to wane, and can
create larger operational issues.
Chains such as McDonald’s and Wendy’s are actively shifting to
more franchised models. Deep discounts can create short-term
traffic boosts of the least loyal customers -- those seeking the
cheapest deals.

9. % of Fast-Food Company-Operated Locations

10. Sonic, Bojangles need to focus on value perception beyond price

11. Smaller, regional restaurant chains including Sonic, Popeyes,
Bojangles, Del Taco and Jack in the Box may be forced into an
unprofitable value-meal focus to compete with national chains,
which could erode restaurant-level margins.
To offset this pressure, messages around quality ingredients,
customization, preparation and brand uniqueness are components
that may help smaller chains increase value perception beyond the
dollar sign, making it easier to defend market share.

12. Fast-Food Restaurant-Level Margins

13. Quick-service promotions may force Popeyes and Sonic to discount

14. A protracted quick-service industry price war could pressure
traffic and sales at Sonic and Popeyes, forcing the chains to
increase promotions or risk losing market share. Sonic has said
it’s comfortable with the strong value on its menu and that its
unique product offering lets the chain compete with McDonald’s
and Burger King without increasing discounts.
Popeyes said it doesn’t want to overreact to the promotional activity,
but is developing contingencies should the discounting persist.

15. Popeyes & Sonic Same-Store Sales

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