Buffalo Wild Wings Soar as McDonald's Mighty Wings Flop
Much like Chicken McNuggets, Mighty Wings could have been a major seller for McDonald's (MCD). Poultry is a giant segment in the U.S. food industry; Americans spent $70 billion on chicken in 2011. Yearly, Americans consume 83.6 pounds of chicken per capita, more than any other country in the world. One part of the chicken that has grown tremendously in popularity is the wing. The National Chicken Council estimated that in 2012 more than 13.5 billion chicken wings (over 3 billion pounds) were marketed, not including the wings sold attached to the whole bird. Of those 13.5 billion chicken wings, an estimated 9.5 billion wings (2.2 billion pounds) were sold via foodservice channels.
BUFFALO WILD WINGS SHOWS STRONG GROWTH
Buffalo Wild Wings (BWLD) has capitalized on the public's taste for chicken wings and has grown one of the more successful casual dining restaurants in recent years. The business has grown from one store in Columbus, Ohio in 1982 to 407 company-owned and 525 franchised stores throughout the U.S. And while casual dining has been soft, Buffalo Wild Wings continues to exceed analysts' growth forecasts. For the third quarter 2013 Buffalo Wild Wings sales soared 27.9% to $315.8 million, with net earnings of $17.9 million. Same store sales rose 4.8% for company stores and 3.9% for franchises. It's no wonder the stock has nearly doubled YTD, up 97% closing on Monday November 4th at $144.96 per share. At the same time Buffalo Wild Wings was experiencing tremendous growth, MCD's Mighty Wings were flopping.
SO WHAT WENT WRONG WITH MCDONALD'S MIGHTY WINGS?
Mighty Wings appeared to be a logical move for MCD; the food giant's other chicken products, like McNuggets, have been a huge success, and the McWrap was selling well. Plus the demographics favored MCD, as chicken places only represented 16% of the wing business, while casual dining represented 33%. MCD also had the outlets, the kitchens, and the financial might to flood the airways with promotions.
While not quick to call Mighty Wings a flop, Don Thompson, McDonald's chief executive, commented that there were a few issues with the new item. He did however go on to say they were not the smash success he had hoped for. According to Mr. Thompson, Mighty Wings met internal targets, but the product "was not strong enough to offset" weak sales trends. Mr. Thompson did feel that the Mighty Wings "resonated with customers," but that the price was "not the most competitive." And he's probably correct, as people have come to expect MCD food to have a price point less than casual dining restaurants like Buffalo Wild Wings. Mighty Wings came in packs of three for $3.69, five for $5.59, and 10 for $9.69, which were similar in pricing to Buffalo Wild Wings. MCD still expects to sell 35 million pounds of wings before removing the item from the menu-- and according to Mr. Thompson we will see wings again.
So what went wrong? Pundits lay the blame on four issues: spice, price, appearance, and the economy. Mr. Thompson even commented on the spice, noting that the flavoring made the wings too spicy for some consumers. But I think there's a fifth reason, and this fifth reason may be a bigger issue for MCD as a company - and that reason is lack of focus. Why would MCD allow a product to be introduced at a price point that one would pay at a fast casual or casual dining restaurant? And why allow a product out that was too spicy for a lot of MCD customers? And while Mr. Thompson acknowledged the problem after the fact, one has to wonder why these issues were not addressed in development and market research.
MCD started with nine items in 1948 cooked in an assembly line fashion, and for a number of years slowly and carefully expanded its products. Since 2007 MCD has added roughly 60 items and, according to data from menu researcher Datassential in Los Angeles, MCD now has a menu of approximately 145 items-- and many of the newer items, like the McWrap, are more labor intensive to build. Though the company has had a number of flops in the past-- think Arch Deluxe-- with each new item upper management focused on developing that item into a highly successful product-- think Big Mac and Chicken McNuggets and the McRib. I was excited with MCD's Mighty Wings and was expecting a mass marketing promotion that the company is so known for… it never came. Mighty Wings were put on the menu, but where was the promotion? Where was the hype? Mighty Wings could have been successful; Buffalo Wild Wings proved that America wants chicken wings! And while one can blame spice, price, appearance and the economy, I think the bigger issue is that the company lost focus, and people felt no urge to try the new product.
As noted above, MCD menu is too large, too complex, and is all over the place. It has too many items in too many categories trying to please too many people. MCD developed its McWrap to compete against Subway. Its McCafe was designed to compete against Starbucks, and its premium burgers to compete against the fast casual burgers like Five Guys. All the while forgetting to focus on what made the company great: a limited menu with consistent food at a low price, and heavy advertising on the menu items. And I think the failure of Mighty Wings is a symptom of the lack of focus, which is the root of the problem that MCD is having today. And if I'm correct, that means that there is a much larger underlying issue that the company needs to address.
EVEN WITH ITS ISSUES, MCDONALD'S IS STILL A GREAT COMPANY TO OWN
Let's understand, MCD is not going away nor is it in any trouble. Quite the contrary, I see the company as a good buy; it still shows good revenue growth, solid earnings per share, and its profit margins continue to expand. But it needs to go back to its roots and focus on what made the company great. The company showed solid third quarter growth. Q3 results global comparable sales increased 0.9%. Consolidated revenues increased 2%, consolidated operating income increase of 6%. Diluted earnings per share were up 6% to $1.52. And the company returned $1.3 billion to shareholders through dividends and share repurchases. MCD also announced it raised its quarterly cash dividend by 5% to $0.81 per share-- the equivalent of $3.24 per share annually.
However, MCD expects global comparable sales for the month of October to be relatively flat. Mr. Thompson commented:
"While we are focused on strengthening our near-term performance, the current environment continues to pressure results. Around the world, we remain confident in our ability to drive sustained, long-term profitable growth through our global growth priorities - optimizing the menu, modernizing the customer experience and broadening accessibility. Moving forward, we are committed to enhancing shareholder value through disciplined investments that support our long-term growth opportunities and further differentiate Brand McDonald's."
While Mighty Wings may be a flop, MCD is still a powerhouse in the industry. And in an industry that is facing a challenging economy and stiff competition, MCD is less than 6% off its 52-week high, closing on Monday November 4th at 97.31 per share. If the company brings back Mighty Wings as a featured item and focuses on proper promotions, the wings or any other product that would fit in MDC's business model could be as successful as Chicken McNuggets or the McRib. And while I've been critical on upper management's lack of focus, I am a strong believer in the future of MCD and consider it a buy.
As for Buffalo Wild Wings, the company has risen almost 25% in the last month and its PE ratio is high at 40.38. And while I do not like to chase stocks, like Chipotle (CMG), this stock may be an exception. The company has almost doubled its average unit volume in the last 10 years from $1.5 million to $2.9 million. And they've done so by focusing on three things they do well: chicken wings, beer, and sports. And it clobbered MCD when it came to selling chicken wings. The company plans on expanding to 1700 outlets in the U.S. and an additional 300 globally. According to CEO, Sally Smith, the company plans on opening 95 new outlets in 2014. I like this company and though it's risen considerably in the past year, I think it still has plenty of room to grow.