Fast food flameout
Burger King reported fewer customers in March. But McDonald's says people are still feasting on Big Macs. This is why you should bet on companies, not sectors.
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| Although shares of McDonald's have cooled a bit lately, the stock has held up much better than shares of rival Burger King -- not to mention the broader market -- during the recession. |
NEW YORK (CNNMoney.com) -- Cheap is chic. The recession has proven that.
But what really hammers home the point is that fast-food restaurants are doing everything they can to lure consumers in with value meals.
It's hard to avoid commercials touting big bargains from the likes of McDonald's (MCD, Fortune 500), Burger King (BKC), Wendy's (WEN) and Yum Brands' (YUM, Fortune 500) Taco Bell, not to mention privately held Subway.
Taco Bell is offering nachos for as cheap as 79 cents. A buck and change can get you a double cheeseburger at McDonald's or a Whopper Jr. (the plural, according to an old Onion bit poking fun at William Safire, is Whoppers Jr.) at Burger King. And if you're more flush with cash, five dollars allows you to wolf down a foot-long hero at Subway.
However, these great caloric bangs for your buck aren't helping all the fast-food restaurants.
Burger King, the nation's No. 2 hamburger chain stunned Wall Street this week when it announced that "significant traffic declines in the month of March" are going to lead to a hit to profit margins this quarter. Shares of Burger King tumbled nearly 18% on the news.
Now it's tempting to conclude that the development means that fast food isn't recession-proof after all. But that would be wrong.
Instead, Burger King's problems appear to be a classic example of why any investor should think twice before making bold bets on an entire industry. In any market environment, you're going to have winners and losers.
Right now, Burger King's woes appear to be McDonald's gains. In an interview on cable network CNBC Friday morning, McDonald's CEO Jim Skinner (SKINNER!) said that Mickey D's was gaining market share in almost all of its markets and that sales were off to a decent start this year despite the recession.
That's worth noting. McDonald's was one of the few major blue chip stocks to actually finish 2008 higher than where it started, but shares have retreated a bit this year.
Some investors may be taking profits in McDonald's because of hopes that the economy may actually be set for a recovery. If that's really the case, shares of so-called defensive companies like McDonald's would probably lag stocks in more economically sensitive sectors like technology, banking and retail.
But while it's probably true that the economy is starting to finally near a bottom, it's hard to imagine the consumer going on lavish shopping sprees anytime soon.
Investors may be celebrating the first-quarter results of big banks. However, Citigroup (C, Fortune 500) and JPMorgan Chase (JPM, Fortune 500) each reported increases to their reserves for future credit losses. And as long as unemployment remains on the rise, a lot of people are going to be worried about job security.
That means a lot more dining out will be confined to the likes of fast-food joints as opposed to fancy steakhouses. That clearly bodes well for McDonald's -- even though it may not for Burger King.
Whether or not Burger King can turn things around and start to regain market share from McDonald's remains to be seen. The company, which is known for some bizarrely memorable ad campaigns, may have stumbled recently and turned off consumers.
Burger King recently said it would revise an ad it had for its Texican Whopper in Europe that was thought to be offensive to Mexicans. The ad features a tall American cowboy and a short, Mexican wrestler draped in the country's flag.
Closer to home, Burger King has come under fire from many parents for a truly surreal commercial that features the King dancing to a remake of the racy Sir Mix-A-Lot hit from the 1990s "Baby Got Back."
The ad, which is for a kid's value meal featuring Nickelodeon cartoon character SpongeBob SquarePants, shows scantily clad women dancing around and shaking their behinds while the song declares that the King likes square butts.
The cheeky (sorry) ad might be a tad risque for kids, although Burger King and Nickelodeon parent company Viacom (VIAB, Fortune 500) have claimed the ad is meant for more adults. Alrighty then.
But what this all boils down to is that the shifting fortunes of Burger King and McDonald's should prove beyond the shadow of a doubt that it's often a mistake to make bold bets on industries based on economic trends. Keep that in mind whether you're looking to invest in burgers or banks.
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