A Tale Of 2 Fast Food Restaurants

Includes: MCD, WEN
by: New Century

Wendy's (NYSE:WEN) and McDonald's (NYSE:MCD) have performed very differently over the past 10 years. Wendy's shares have lost a significant amount of value, while McDonald's have nearly quadrupled from about $25 to new all-time highs over $100. Interestingly, that performance can be explained, or at least exemplified, by experiences that I have had at local establishments from both eateries.

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My go-to McDonald's is this one, which is actually somewhat famous. I've never visited at a time when the piano player is (apparently) there, but I've seen this McDonald's through thick and thin over the past few months of living nearby. This location was cursed with being across the street from Zuccotti Park, the home of Occupy Wall Street. So for months, the McDonald's was occupied too - on the weekends, evenings, and late nights that I stopped in, there were always grungy occupiers loitering in the restaurant, normally not even purchasing anything (or at least not respecting the "eat and leave in 20 minutes" rule that the true 99% abided by). Despite that, the McDonald's managed to keep the restaurant as clean as possible and kept service brisk and friendly. The food is a bit more expensive than the average McDonald's, but no more than 20% above what would be charged elsewhere. There's nothing better than a late-night, sub-$2 McDouble when it takes about a minute to go from ordering to enjoying.

A secondary McDonald's is a bit off of the beaten path, but isn't completely overshadowed by its Broadway brother since It installed two of these. The awesomeness of the machines certainly impresses anyone seeing one for the first time (as was the case with me a few months ago), but more importantly, I think that they'll meaningfully increase sales. I normally never buy soda at a fast-food restaurant, but the fun of using this machine (and creating drink combinations that one cannot purchase or experience elsewhere) has persuaded me into buying one on some of my visits.

So both McDonald's have exceeded my expectations. They are fast-food dining is as it should be - quick, affordable, and pleasant, even when forced to handle dozens of confrontational protesters.

On the other hand, the Wendy's of the neighborhood has to be the most poorly-run dining establishment I've ever visited. My biggest beef with the Wendy's is that they are almost always sold out of baked potatoes. This, to me, is simply moronic. Not only are baked potatoes probably one of the highest-margin non-drink products, but they are also probably one of the easiest to prepare. And if the issue is a lack of timely delivery from suppliers, baked potatoes are an item that a savvy franchisee or manager could keep in stock by simply buying potatoes and baking them without a customer ever detecting any variation in product. No real restauranteur would be dumb enough to not see the easy solution to that problem - but somehow, the management of this restaurant is. Also, pretty much everything else about the experience is awful too - slow service, unpredictable hours (they aren't posted - so one cannot rely on them to be open for a late-evening dinner), and generally unfriendly employees.

Though obviously these experiences cannot represent entire chains, they do happen to mirror the overall success (measured by share price change) of the two restaurants. McDonald's has executed phenomenally over the past decade by keeping customers satisfied with clean restaurants, pleasant service, low prices, and relevant new items, while Wendy's has underperformed because of poor decision making, including the purchase (and sale) of Arby's.

Though there are no signs of improvement at my Nassau street Wendy's, thankfully for shareholders, chain-wide performance does seem to be improving. They have/are going to overtake Burger King as the #2 hamburger restaurant in the United States, thanks to recent success driven by listening to customer desires and doing what they hear, like launching improved hamburgers and focusing on fresh and simple food. (I still patronize Wendy's because the Double Stack is, by far, my favorite fast-food value hamburger.) If Wendy's can strengthen that focus on improvement via customer insights, they have a good shot at turning the business around and creating shareholder value. The performance of McDonald's, and already-massive chain ten years ago, demonstrates that a mature chain in a mature market can create lots of value just by improving itself.

While McDonald's has appreciated in value substantially, continued execution should support the current share price. There is still plenty of opportunity to win a greater share of consumers' wallets by improving product offerings and providing better service than competitors. Just like the 160 Broadway location, McDonald's shares seem likelier to please than the competition.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.