Have We Reached Peak Burger?

September 04, 2014

For most of its history, the fast-food business in the U.S. has been characterized by rapid and dependable growth. From founder Ray Kroc’s first restaurant in Des Plaines, Ill., in 1955, McDonald’s (MCD) became a chain of more than 700 stores in the U.S. within 10 years. By 1983 there were 6,000, and for the next two decades the company opened about 360 U.S. outlets every year on average. Smaller rivals Burger King Worldwide (BKW) and Wendy’s (WEN) had impressive early growth stories of their own.

In recent years, however, the companies that made Big Macs and Whoppers into icons of American pop culture have seen robust domestic expansion disappear from their menus. Sales at restaurants open for at least 13 months slipped 0.2 percent last year in the U.S. at McDonald’s and 0.9 percent at Burger King for the U.S. and Canada. Even including newly opened locations, which experience rapid growth rates in their early months, sales at the major fast-food chains grew only 1.1 percent last year, compared with 4 percent in 2012, according to Euromonitor International.

Slower sales growth has many industry watchers forecasting the once unthinkable: the peaking of burger joint growth in the U.S. “Traditional fast food—McDonald’s, Sonic (SONC), Wendy’s, KFC, Taco Bell—are fairly well-saturated in this country with not a lot more room left for growth,” says Peter Saleh, senior research analyst at brokerage Telsey Advisory Group.

The big chains already may be reacting to the shift in a surprising way: by selling more of their company-owned U.S. outlets to franchisees. In 2013, Wendy’s said it was selling more than 400. Yum! Brands (YUM), which owns KFC and Taco Bell, got rid of 214 restaurants last year and 468 in 2012. McDonald’s offloaded 200 stores this year, including an undisclosed number in the U.S. Burger King owns less than 1 percent of its U.S. locations.

Some Wall Street analysts encourage such “refranchising,” because it transfers the cost of running restaurants onto franchisees, which in turn helps the parent company’s bottom line. Others say the big chains, which are increasingly global, are simply insulating themselves from a U.S. business that has topped out as fleet-footed competitors appeal to a new generation of diners who prefer healthier meals they can build and customize themselves.

The fast-food chains are looking to their international businesses for growth, as the middle classes in China, Brazil, and other emerging markets embrace American-style eats. Last year, McDonald’s got about two-thirds of its revenue outside the U.S., compared with about half in 1994. And more than half of sales at Yum! Brands comes from its 6,380 stores in China.

In 2013, McDonald’s added only 121 stores in the U.S. (after subtracting the number of U.S. stores that were closed during the year). So to boost revenue, it needs to sell more food at each location. That’s not happening—U.S. same-store sales have slid or been unchanged for nine straight months—and it’s getting harder to increase sales as consumer habits change and the competition ramps up.

McDonald’s and its big rivals have tried to adapt by adding more healthful options—chicken sandwiches, salads—to the menu. But because they built their business selling burgers and fries, the traditional chains mostly attract people who like burgers and fries.

Diners who say they prefer to eat healthier aren’t choosing McDonald’s over relative newcomers such as Chipotle Mexican Grill (CMG). Last year, Don Thompson, McDonald’s chief executive officer, acknowledged that the company’s salads weren’t selling well—making up only 2 percent to 3 percent of U.S. sales, compared with 13 percent to 14 percent for the chain’s Dollar Menu, which includes burgers and hash browns. The fast-food giant took slow-selling Caesar salads off its menu last fall. Burger King recently axed its lower-calorie Satisfries from most stores. Other healthful fast-food flops include McDonald’s McL

New fare also complicates and bogs down kitchens that were optimized to quickly churn out burgers and fries. That’s why drive-through times have gotten slower for the major chains over the past decade, reducing the quick-service draw for some fast-food diners. It takes at least 30 seconds longer to get through a McDonald’s drive-through now than it did in 2003, according to studies by QSR magazine and Insula Research. The trend is true for Burger King and Wendy’s, too.

(Bloomberg Businessweek)

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