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Why did sales slow at fast-food burger chains?

Quick-service giants McDonald’s and Burger King lost out to chains such as Taco Bell and Chick-fil-A last year, says RB’s The Bottom Line.
Photograph courtesy of The Wendy's Co.

The biggest burger chains in the U.S. couldn’t gain much traction with consumers last year.

McDonald’s reported 2.3% same-store sales growth in the fourth quarter, which, it turns out, would lead its primary competitors by at least 150 basis points.

By contrast, rival Burger King reported 0.8% U.S. same-store sales in its fourth quarter. Wendy’s struggled to 0.2% growth. And Jack in the Box same-store sales declined 0.1%.

It’s difficult to judge an entire sector based on one quarter’s performance, but those results capped off a year that was surprisingly challenging for the traditional fast-food burger chains. And a lot of that business appears to be going to two players in particular: Taco Bell and Chick-fil-A.

Taco Bell’s same-store sales rose 6% last quarter. Chick-fil-A’s total sales rose an estimated 13.4%, according to Technomic data. Both chains are big rivals and are now larger than all of the burger chains except for the big one.

The fast-food burger sector has been fighting an intense war for customers over the past couple of years, driven in part by aggressive deals from Burger King and Wendy’s that have roiled both McDonald’s and Jack in the Box.

“When you look at who’s winning, they’re essentially doing one of two things,” Jack in the Box CEO Lenny Comma told analysts this week in an earnings call in which value was mentioned 26 times, according to a transcript of the call from document service Sentieo.

“They are selling a lot of a la carte items very cheaply, and they have a lot of brand equity in that space where the consumers come to know them for those value-oriented offers where the consumer can stretch their buck. Or they are selling abundant value where it is a significant amount of food for the dollar.”

McDonald’s, meanwhile, spent much of 2018 trying to find the right combination of value to get customers to come in more often. It had plenty of that, from a $1 $2 $3 Dollar Menu at the outset of the year to a $6 meal deal late in the year.

Some, in fact, worry that its prices outside of those value offers were the real problem at the heart of its declining traffic.

Indeed, it’s difficult to get a good grasp on the value consumer. Wendy’s and Burger King both generated strong sales two years ago in part based on their value strategies, but it’s clear those strategies lost momentum toward the end of 2018. Burger King’s $1, 10-piece chicken nugget deal, for instance, didn’t work as well as its previous 10-piece deal for $1.49.

At the same time, Jack in the Box’s same-store sales were declining late last year before it shifted to value.

And it’s not like Taco Bell isn’t competing in the value space. The chain spent much of 2018 working heavily to solidify its value message—routinely testing new products to price at $1 to lure its young, value-oriented customer base.

Chick-fil-A, by contrast, strenuously avoids the value game. Its average ticket is higher than any of these chains, and it focuses instead on customer service, speed and simplicity. It’s amazing what a chain can do when it has a strong reputation for those things.

It helps that consumers are showing a lot of love for both chicken and Mexican food. They are two of the strongest performing sub-segments in the fast-food space. Or maybe they simply did a better job last year connecting with their consumers.

Regardless, the inability of value offers to do a better job at generating stronger traffic at the burger chains, all of which depend on volume, has to be a major disappointment to the operators responsible for earning profits on those discounts. Especially when labor costs are rising so much.

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