McDonald’s fires volley at 'underground' competitor
For McDonald's (MCD), the biggest worry of the moment may be Doctor's Associates Inc.
No, that's not a medical organization. It's a business that owns a very large restaurant chain. While it's true you could be excused for not knowing them, you're almost certainly familiar with their well-known operating unit. That would be Subway, the Milford, Conn.-based submarine sandwich shop that's grown at an extraordinary rate and is approaching 40,000 restaurants worldwide. It's nearly doubled its store count since 2003, the year it reached 20,000 units.
Shouldn't the headaches for Ronald McDonald & Co. come mainly from Burger King (BKW) and Wendy's (WEN)? They without question pose their own challenges, but, according to a report this week in Advertising Age, Subway also appears to be prominent among the things that cause angst for the Oak Brook, Ill., burger giant, in particular with regard to its appeal to the millennial generation.
Citing an internal company memorandum it obtained, Ad Age says McDonald's has referred to the wide launch of the chicken McWrap as the "Subway buster," viewing it as a product that will help keep younger eaters from choosing the sub chain when they're looking for a fast meal. McDonald's has learned that, without the McWrap, some 22% of diners in the roughly 18-32 age range would pick Subway, the article indicates. In addition, the quarter-pounder seller says in the memo that it "is currently not in the top 10" of the demographic's favorite chow establishments.
Lynne Collier, a Dallas-based restaurant analyst with Sterne Agee, has followed McDonald's for around three years, and she found it a bit curious that Subway would be at the front of the company's mind. After all, in addition to the found-everywhere chains noted above, other similar-to-McDonald's and quite widespread restaurants include Jack in the Box (JACK) and Sonic (SONC).
"I don't automatically think Subway," she says. "But apparently they are viewing Subway as somewhat of a major competitor."
What the (young) people want
Stresses about the eating trends of those born in the 1980s and forward aren't new, says Nick Setyan, a restaurant analyst with Wedbush Securities in Los Angeles. "The problem with millennials, that's been a category-wide problem," he says. "It hasn't just been a McDonald's problem."
A crucial influence in that has been the advent of "fast casual" chains, names like Panera Bread (PNRA) and Chipotle (CMG). Companies in this group might, for instance, go out of their way to emphasize ingredient quality or awareness of social issues, he says. That's important to the young, and it's fine that, on the price spectrum, these restaurants would be located a step above a McDonald's or a Burger King for most menu items.
Source: Subway data from Entrepreneur. McDonald's data from SEC filings.