Should McDonald's prepare to fight Chick-fil-A for business?
Despite the incessant chatter about 鈥渂urger wars,鈥� the competitor McDonald鈥檚 should be closely watching is neither Burger King nor Wendy鈥檚 but Chick-fil-A, according to an investor brief from Janney Montgomery Scott analyst Mark Kalinowski. He calls the chicken chain a 鈥渟erious and growing competitive threat鈥� to the largest QSR brand.
Chick-fil-A won鈥檛 top McDonald鈥檚 in total sales over the next decade, but Kalinowski argues that it may grow faster. 鈥淚f Chick-fil-A can add $6.3-$9.0 billion to its systemwide sales over the next 10 years, it is entirely possible that this will be similar to鈥攐r worst-case, from McDonald鈥檚 perspective鈥攇reater than the systemwide sales that McDonald鈥檚 can add to its domestic business over that same time,鈥� he writes.
Privately held Chick-fil-A had US sales of $5,052,589 in 2013 (from 1,775 units), about triple its size in 2003. Publicly held McDonald鈥檚 dwarfed it with domestic sales of $35,856,000 (and 14,278 stores), and while its 47 percent increase since 2003 is solid, it doesn鈥檛 match Chick-fil-A鈥檚 growth, and certainly not the chicken chain鈥檚 12.7 percent聽compound annual growth rate. Kalinowski says Chick-fil-A鈥檚 growth 鈥渨as achieved through a balanced mix of unit expansion (which ranged annually from +3.2 percent聽to +6.2聽percent, depending on the year) and consistently positive same-store sales growth.鈥�
Kalinowski postulates several scenarios about future growth by both chains. Under what he calls Sensitivity Analysis #1 (positing 4.5 percent聽annualized unit growth and 4 percent聽annualized same-store sales growth), Chick-fil-A would rise to domestic sales of $11.4 billion in 2023. A second scenario鈥攁ssuming 5 percent聽unit growth and 6 percent聽same-store sales growth)鈥攇rows Chick-fil-A to domestic sales of $14.3 billion in 2013.
鈥淲hile Chick-fil-A remains meaningfully smaller than McDonald鈥檚 US today, to the extent it could be ignored as a competitive threat ten years ago, we would argue that it can no longer be ignored as a long-term competitive threat today,鈥� according to Kalinowski.
His scenarios for McDonald鈥檚 growth are far less confident. One, based on a 2.6 percent聽annual sales gain and just 0.6 percent聽unit growth, moves McDonald鈥檚 from an estimated $36.8 billion for 2014 to $46.3 billion in 2023. A second is even more dire, based on a 0.3聽percent annual gain in both sales and units. Under that scenario, McDonald鈥檚 sales would grow less than 3 percent聽to $36.9 billion in 2023.
Chick-fil-A鈥檚 rapid rise from a distant No. 2 in chicken sales to the category leader, passing KFC, 鈥渕ay hint that it could become a larger competitive threat to many more fast-food brands over 2014 and beyond鈥攁nd not just chains traditionally defined as 鈥榗hicken鈥� brands,鈥� Kalinowski writes. McDonald鈥檚 sells a lot of chicken, he notes, and it is the largest QSR brand so it has the most to lose by the continued ascent of Chick-fil-A. Kalinowski rates McDonald鈥檚 shares Neutral.
