A Not-So-Big Gamble: McDonald's Has 13.5 Billion Reasons to Enter the Chicken Wing Business
What better way for the world's biggest restaurant chain to try
and raise sales than by adding Americans' favorite protein,
chicken, to the menu -- actually, adding chicken wings, to be
precise. And that's what
) intends to do when the company rolls out its new "Mighty Wings"
on September 9, with total US coverage by September 24. And though
one might roll their eyes at the burger joint's newest offering,
one has to realize that Americans consume more chicken than any
other country in the world; the US consumes 83.6 pounds of chicken
per capita, shelling out
Chicken is an enormous segment of the US food industry, and it appears as though McDonald's intends to increase its exposure. The fast food chain will be adding to its already successful Chicken McNuggets and its earlier 2013 rollout of its Chicken McWraps. The National Chicken Council estimated that more than 13.5 billion chicken wings (which comes to over 3 billion pounds of chicken) were marketed as wings in 2012 -- and that's not counting the wings sold that were attached to the whole bird. Of those 13.5 billion wings, an estimated 9.5 billion wings (2.2 billion pounds) were sold via foodservice channels.
McDonald's is not just winging it here. The world's largest hamburger chain has been trying to introduce new menu items to spur recent sluggish sales, including healthier items like egg-white breakfast sandwiches and Chicken McWraps. The company's president and CEO Don Thompson , who took the helm of the company in July, has been actively overhauling McDonald's menu in order to boost sales, especially in the US where it currently has about 14,100 locations that make up approximately 32% of the company's revenue. Though this year's top line is forecast to improve 3% to $28.46 billion, slowing sales have brought McDonald's into uncharted territory; after nearly a decade of positive numbers, the company saw its domestic same-restaurant sales decline last October, although they have since rebounded. In the prior five years, sales growth has been 3%, -3%, 6%, 12%, and 2%.
Increasing prices to boost revenue at this time does not seem like a logical option for McDonald's as consumers in a number of global markets are still financially too strapped to pay for more expensive products, as noted by the Dollar Menu, which now accounts for roughly 13% to 14% of the restaurant chain's revenue. Last month, Thompson commented on the sluggish sales, pointing out that McDonald's is not the only company that has experienced a slowdown; the overall informal dining market is struggling in general as "economic uncertainty is pressuring consumer spending." Thompson believes the "informal eating-out" category (fast food) has been hit a bit harder than retail overall.
But one can't place all the blame or McDonald's sluggish sales on the lagging global economy; one also has to look at the changing tastes of the customer, especially the younger Millennials , the 80 million Americans ages 18-32 who have slowed their visits to McDonald's while opting to spend a little more for a healthier dining experience, like Chipotle ( CMG ) or Panera Bread Co ( PNRA ). Millennials are an important demographic as they will be influencing the next generation to come.
So will chicken wings be the next successful menu item? Only time will tell. But in the 1990s, McDonald's tested chicken wings with mixed results. Perhaps McDonald's was just a little ahead of the chicken wing boom... or perhaps it experienced a setback early on when a Virginia resident claimed that she found a fried chicken head in her box of wings. Although inspectors found no evidence of chicken heads at the restaurant or the processing plant, the story was widely circulated online, and by 2003, Mighty Wings were discontinued.
Today, however, adding wings to the menu may make sense. Buffalo Wild Wings ( BWLD ) saw total revenue increase for the second quarter of 2013; it went up 37.8% to $303.8 million. In ten years, the company has grown from an IPO stock offering $17 per share to a current price per share hovering around $105, and a market capitalization of $1.98 billion. And while one thinks of chicken wings when visiting Buffalo Wild Wings, KFC ( YUM ) and Popeye's (NASDAQ:AFCE, most chicken wings are not sold in "chicken" places; only 16% of wings sold are sold in restaurants associated with chicken dishes. In McDonald's favor is the fact that casual dining restaurants represent the largest number of chicken wings sold, with 33% of the chicken wings sold in restaurants, followed by pizza places with 26%.
If the company's entry into the chicken wing business is successful, it could spell problems for other wing providers -- and not just in terms of lost sales, but in terms of higher product costs as well. According to Farha Aslam , an analyst at Stephens Inc., chicken wings sell for roughly $1.44 per pound, based on Georgia dock wholesale prices, but with the buying power behind McDonald's, prices could rise to $2 per pound by January.
McDonald's is still the biggest player in the fast food business, with a market cap of $96 billion. Year-to-date, the stock is up just over 7%, closing yesterday at $94.52, off its 52-week high of $106.09. The company also has an excellent dividend with a yield of 3.21. If Mighty Wings fail like the Arch Deluxe, I still don't see the stock slipping much, but if the Mighty Wings are a success, I look for sales to be strong, revenue to rise, and the stock to meet and exceed new highs.
J. Corenman has been a professional writer for over 20 years and has owned numerous food and beverage businesses, too. While he prefers to invest mostly in large companies, he does enjoy searching smaller companies and looking for possible hidden gems. He tries to focus his research on biopharmaceutical companies, retail pharmacies, and the food service industry.