Saturday, December 3, 2011

With McDonald entrenched at No. 1, Wendy¡¯s aims for second

McDonald��s (NYSE:MCD) is the 800-pound gorilla of fast food. The $100 billion company turned quick-service restaurants into a science, has over 33,000 locations worldwide and is a heavyweight in breakfast and beverage sales in addition to selling burgers and fries.

It��s a nearly impossible task to knock No. 1 McDonald��s from its perch. So that��s why fast-food restaurant Wendy��s (NYSE:WEN) is instead focused on the No. 2 spot — and according to reports, has dethroned Burger King to become America��s second-most-popular burger joint.

The strategy? Higher quality foods, redesigned restaurants and marketing that showed American consumers who��s the best �� behind McDonald��s, of course.

It may sound silly to have a goal of second place. But it��s important to be realistic. McDonald’s dominates the marketplace, with a 49.5% share of the ��limited-service burger segment�� business. Consider: With just a bit of growth, MCD will do more in sales than all of its competitors combined.

In 2010, Burger King’s market share in the burger biz was 13.3%, while Wendy’s share was 12.8%. But thanks to healthier options — including skin-on fries seasoned with natural sea salt as well as higher quality fare like its premium Dave��s Hot ��n Juicy Cheeseburgers line — reports indicate big gains for Wendy��s.

According to a report by Janney Capital Markets released Tuesday, Wendy��s likely passed Burger King in market share as a result. And if it hasn��t yet, it will in the very near future.

That may be a bragging point for Wendy��s — however, the U.S. ��limited-service burger segment�� is only a small piece of the fast-food pie. Chipotle (NYSE:CMG) has been one of the biggest growth stories of the past few years — with shares soaring over 260% since January 2010. Wendy��s stock is up less than 10% in the same period.

Also, i nternational growth is really what��s fueling American-based restaurants. Take Yum! Brands (NYSE:YUM). Almost 75% of its operating profits come from abroad, including from some 3,200 KFC locations in China — and even KFCs in Kenya! Even behemoth McDonald��s has room to grow overseas, with the Golden Arches recently announcing a plan to open 700 stores in China over the next two years — roughly one a day — to build on its current total of 1,300 locations in the Middle Kingdom.

In short, a bigger bite out of the American burger market is nice��but not filling enough for a big restaurant stock these days.

Part of the reason restaurants like KFC and McDonald��s do so well abroad is thanks to a well-followed brand in the U.S. Wendy��s might be able to export its popularity later. However, with rivals like Yum! and Mickey D��s already gobbling up international market share, it shouldn��t focus too much on winning in the U.S. when the big profits are to be made overseas.

Jeff Reeves is the editor of InvestorPlace.com. Write him at editor@investorplace.com, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. As of this writing, he did not own a position in any of the aforementioned stocks.

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