McDonald's (MCD) has been on a tear in recent months and non-traditional competitors are feeling the pain.
Both Popeyes Louisiana Kitchen (PLKI) and DineEquity (DIN) -- the owner of IHOP and Applebee's -- reported earnings this week. The news was largely positive, but both companies acknowledged pressures they face from burger chains.
For quick reference, fourth-quarter earnings for the three companies grew compared to the year-ago quarter. DineEquity reported adjusted earnings of $1.59 per share, up 37% from a year ago; Popeyes reported adjusted earnings of $1.91 per share, up 16%; and McDonald's reported earnings of $1.31 per share, also representing a 16% increase over the same period.
However, while shares of McDonalds are up 18.7% over the last year, shares of DineEquity and Popeyes are down 12.5% and 9.5%, respectively.
In the last few months, McDonald's started serving breakfast all day -- pitting it against IHOP. It also launched a fried chicken sandwich earlier this year, which puts pressure on Popeyes. Not to mention, McDonald's was able to compete with both on price as it was offering a "McPick 2 for $2" deal. That promotion has since become a "McPick 2 for $5" offering as several menu items were added. Indeed, the increase is steep, but the economics are still enticing for the budget-minded consumer.
"I would tell you, on the IHOP side, there's no question that McDonald's is affecting, I think, everybody in the breakfast space because they are spending so much money on breakfast, and so we are being very thoughtful about that," DineEquity CEO Julia Stewart said on a call with analysts on Wednesday.
While it is too soon to quantify how much pressure Popeyes feels from the new McDonald's chicken sandwich, the company clearly feels pressure from burger chains.
"It may not be obvious to you, but the interaction between Popeyes customers and burger customers is very high. Our customers loves Popeyes chicken and they love great value," CEO Cheryl Bachelder said on a call with analysts.
Indeed, the value proposition of burgers is certainly there: The price of beef has fallen 11% over the last year, according to data provided by Bloomberg. The decrease allows burger chains to compete on price, and for consumers, well, who doesn't love a bargain?
"If you watch TV, you can just see ads of four for $4 and two for $2 and all these very crazy price points that understandably reflect a very favorable beef pricing environment," Bachelder said.
That said, not all players in the burger space are benefitting equally. While McDonald's chose to offer bargains, Action Alerts PLUS holding Jack in the Box (JACK) launched a "premium" menu offering after seeing success in test markets.
"The strategy utterly backfired," said Jack Mohr, Director of Research of Jim Cramer's Charitable Trust. "The higher-quality offerings lost out to the value push at fellow fast-food chains, namely McDonald's and Wendy's. The company's strategy was anything but a "proven" success; instead, it violently backfired as consumers actually gravitated (or, "stooped") toward the lower-quality, discount-bundled products offered by its fast-food competitors."
It appears that a battle is emerging in the fast-food space and McDonald's may be an early winner in the burger space, while TheStreet's Brian Sozzi notes pizza may also be a winner.
"I think of it as a temporary pressure," Bachelder at Popeyes said. "We have seen it before. We have competed well against it before with new products and our own value propositions. So, a temporal thing."
Tell us: Where do you get your fast food fix?https://t.co/qZg9hq6FW9¿ RealMoney (@TSTRealMoney) February 25, 2016