3 Reasons Why Jack in the Box Is Beating McDonald's

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A Jack In The Box Restaurant in Tyler Texas sits along Broadway open for business.
Stanley Marquardt/AlamyA Jack in the Box restaurant in Tyler, Texas.
McDonald's (MCD) is in a funk, and things are only getting worse. The world's largest burger chain posted uninspiring financial results over the weekend, with global comparable sales slumping 2.5 percent for the month of July.

Things were even worse closer to home, where comps at stateside stores clocked in 3.2 percent lower than the same month a year earlier. After three consecutive quarters of negative domestic comparable sales, McDonald's seems ready to stretch that streak to four periods of year-over-year quarterly declines.

Things may be bad for the revenue leader, but let's not paint the entire fast food industry with a broad basting brush. Many of McDonald's smaller rivals are doing just fine, and we heard from one of them -- Jack in the Box (JACK) -- late last week.

Let's go over a few of the ways that Jack in the Box is holding up better than McDonald's.

1. Comps are Growing at Jack in the Box

Your typical Jack in the Box eatery is still ringing up higher sales than it did a year earlier, unlike McDonald's which has posted negative comps at its U.S. restaurants in eight of the past nine months and is looking at the likelihood of its first year of negative comps since 2002.

Jack in the Box operates on a different fiscal year than McDonald's, but its comparable sales increased 2.4 percent during its fiscal third quarter which consists of 12 weeks ending on July 6. Comps are also positive -- up 1.8 percent -- through the 40 weeks ending on July 6, a period that's roughly in line with the three consecutive quarters of declining domestic sales at McDonald's.

Jack in the Box isn't the only chain that's growing its sales at the individual store level. McDonald's is actually the one that stands out for going the wrong way here.

2. Jack in the Box Kept its Quick-Service Burrito Chain

One of bigger mistakes that McDonald's has made was unloading Chipotle Mexican Grill (CMG). Many burrito buffs have no idea that McDonald's once owned a meaty 90 percent stake in the market darling of the fast-casual space. That's because it spun off the chain in 2006 after helping take it from just 16 locations when it first bought in back in 1998 to more than 500 when it gave it an IPO as a standalone publicly traded company.

McDonald's probably thought it was making a killing, turning roughly $360 million in investments into a $1.5 billion payday, but that doesn't seem so smart today with Chipotle carrying a $21 billion valuation.

Jack in the Box watches over Qdoba Mexican Grill, the growing Chipotle rival with more than 600 locations across the country. It's no Chipotle, but it doesn't need to be. Qdoba's comps improved 7.5 percent in its latest quarter, making it one of the industry's best performers after Chipotle. Jack in the Box isn't in a hurry to sell off the strong concept that will give it some diversification if burgers go out of favor. The same thing can't be said about McDonald's.

3. Jack in the Box Doesn't Have the Stigma of McDonald's

A recent Consumer Reports survey of fast food patrons found McDonald's ranking dead last in the burger category on taste among the country's 21 largest burger chains. Now, taste tests may be subjective, but it's not as if Jack in the Box can claim bragging rights over McDonald's: It was ranked No. 20.

But Jack in the Box is not the poster child for an industry that pays entry-level employees poorly and is often the scapegoat for childhood obesity. Activists have been making plenty of noise as they protest McDonald's, urging it to boost its minimum wage to $15 an hour. You don't see the same kind of public dissent when it comes to Jack in the Box and other chains that aren't necessarily paying their employees any better.

No matter where you stand on the debate for increasing the minimum wage, it's a safe bet that you recognize giants like McDonald's and Walmart (WMT) are ground zero for the topic. They're the leading retailers, and while that has advantages in marketing and purchasing, it's working against the perceived image of these chains today. It's popular to diss McDonald's. Whether or not this is playing a part in the sales declines being experienced at McDonald's, it's clearly not slowing down Jack in the Box.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and McDonald's. The Motley Fool owns shares of Chipotle Mexican Grill. Try any of our newsletter services free for 30 days.

3 Reasons Why Jack in the Box Is Beating McDonald's
Stories about McDonald's hamburgers that last years before rotting are frequently cited as evidence that fast food is loaded with preservatives. McDonald's USA offers another explanation. "The reason our food may appear not to decompose comes down to a matter of simple science. In order for decomposition to occur, you need certain conditions -– specifically moisture. Without sufficient moisture –- either in the food itself or the environment –- bacteria and mold may not grow and therefore, decomposition is unlikely. So if food is or becomes dry enough, it is unlikely to grow mold or bacteria or decompose. Food prepared at home that is left to dehydrate could see similar results. Look closely, the burgers you are seeing are likely dried out and dehydrated, and by no means 'the same as the day they were purchased.'" Keith Warriner, the program director at the University of Guelph's Department of Food Science and Quality Assurance, gives a lengthier explanation.
The ingredients in cheddar cheese slices: Milk, cream, water, cheese culture, sodium citrate, and 2 percent or less of salt, citric acid, sodium phosphate, sorbic acid (preservative), lactic acid, acetic acid, enzymes, sodium pyrophosphate, natural flavor, color added and soy lecithin. "The major ingredient in our signature slices is natural cheese, so the plastic rumor is just a myth," says Nicole Thornton, a McDonald's crew member in Sydney, Australia, in a video. Other ingredients include milk solids, butter and emulsifiers, which improve the color and texture of processed foods. "If you are referring to the smoothness and flexibility of our cheese," she explains, "that is obtained by blending heated cheeses and other ingredients with emulsifiers and then dispensing it onto a smooth chilled surface, just like some of the processed cheeses you'll find in the supermarket."

"McDonald's frying oil contains a small amount of an additive called dimethlypolysiloxane, which helps prevent oil from foaming and spattering in our restaurants," McDonald's USA explains. Dimethylpolysiloxane is also used in some non-food products, such as putty, caulks and cosmetics. For that reason, "there have been individuals who have erroneously claimed that these items are also in our food," the company says, noting that scientific names for ingredients can "sound scary" even if they are safe and approved by the U.S. Food and Drug Administration. 

"For example, the salt you use to de-ice a driveway is a variation of the salt you use in the kitchen, however they are both sodium chloride," the company writes. A McDonald's Canada video explains the process of making McNuggets.

This is one of the most commonly asked questions about McDonald's food in Australia, according to Jonathon Pitt, a McDonald's franchise owner in Queensland. "Absolutely, there is no pig fat in our soft serve -- or in our shakes, for that matter," Pitt says in a video on how the frozen yogurt is made. "The only animal products in our soft serve are the dairy ingredients themselves." That includes milk, cream and milk solids. Sugar is added for sweetness and emulsifiers are used to keep the mixture from separating. "Vegetable gums are also used to give it a thick, smooth texture," he says. "And finally, a little vanilla flavor is added."
McDonald's uses chicken thighs, breasts, tenders and skin for flavoring, according to McDonald's Canada.

The company says it removed the substance from its meat three years ago. "Lean finely textured beef treated with ammonia, what some individuals call 'pink slime' or select lean beef trimmings, is not used in our burgers. Any recent reports that it is are false," McDonald's USA writes.

And what is "pink slime"? Lean beef trimmings -- what's left of the meat after all the choice cuts of beef are taken -- that are treated with ammonium hydroxide, creating the pink hue. Ammonium hydroxide kills bacteria, such as E. coli. The trimmings are banned from human consumption in the U.K., but the U.S. Department of Agriculture deems them safe for people to eat.

McDonald's french fries start with whole potatoes. Here are the ingredients: Potatoes, vegetable oil (canola oil, soybean oil, hydrogenated soybean oil, natural beef flavor [wheat and milk derivatives], citric acid [preservative]), dextrose, sodium acid pyrophosphate (maintains color), salt. They are prepared in vegetable oil (canola oil, soybean oil, hydrogenated soybean oil with TBHQ and citric acid added to preserve freshness), dimethylpolysiloxane added as an antifoaming agent. 

"Once the potatoes are cut, we push the strips to a blancher to remove the natural sugars from the strips," Mario Dupuis, the production manager for McCain, a fries supplier for McDonald's Canada, says in a video. "This will prevent some variation in our color once we re-cook the product. Following the blanching process we add a a dextrose solution to have that nice even coat that we see in the restaurants. We also add an ingredient to our strips to make sure that we prevent the graying of our product throughout the process." Moisture is removed from the strips before they are fried, frozen and packaged for shipping.
None of McDonald's chicken in the U.S. contains added hormones, since federal law bans hormones in poultry. But the same can't be said for beef. "It is common U.S. cattle industry practice to use FDA-approved growth promotants, like naturally occurring or synthetic hormones, in animals being raised to produce beef," McDonald's USA writes. "McDonald's USA does not have any requirements beyond meeting all FDA regulations for use of growth promotants in cattle."
The company assumes at least some of its cattle spend time grazing before heading to a feed lot to be finished on grain. "Farming practices vary, but generally much of the cattle in the U.S., including the cattle we use for our beef, are grass fed for the first part of their lives," McDonald's USA writes. "When cattle enter feedlots in the latter part of their lives, they are provided a balanced diet that may include grains, grasses and mineral blends in their feed."
McDonald's uses forequarter and hindquarter trimmings, as well as whole muscle cuts in its beef patties. McDonald's Australia explains in more detail: "Beef trimmings are portions of meat remaining after the preparation of the whole muscle cuts. Forequarter refers to the front half of a side of beef and hindquarter refers to the rear half. Whole muscle cuts, or primals as they are referred to in the industry, are defined portions of a side [of] beef (or [carcass]). Forequarter primals include the blade, brisket, chuck, and spencer roll, amongst others, and the hindquarter includes primals such as the hind shank, silverside, thin flank and topside. The primals that may be included in our beef raw materials are usually from the forequarter, and typically include the chuck and the blade."

 
Most of the beef that McDonald's uses in U.S. restaurants is raised domestically, with a small percentage from Australia and New Zealand, the company says. All of the chicken served in McDonald's U.S. restaurants is raised domestically.
McDonald's USA explains that the beef is ground, formed into patties and then flash-frozen. "Flash-freezing helps ensure the quality and flavor of our burgers when they are cooked in our restaurants," the company says.

The beef patties are formed from ground beef in a factory, flash-frozen and sent to McDonald's restaurants. Before they are served, the patties are seasoned with salt and pepper and grilled for 40 seconds, according to a video from McDonald's Australia. They are held in a warming bin. "We keep our cooked burgers hot for a maximum of 15 minutes, but we're usually so busy that they don't stay in there for very long," Katie Geoghan, a McDonald's crew member from Melbourne, Australia, says in the video.

"Our eggs are not organic, nor are they free-range; they are from caged hens," McDonald's Australia writes. Caged hens produce the cheapest eggs, which helps keeps McDonald's prices low, the company says. "Our goal is to provide customers with great quality food at great value," the company's answer reads. "The cost of organic or free range eggs would raise the price of our food to a point that our customers may not feel they are receiving the value they've come to expect from us." In the U.S., however, McDonald's buys a "small amount" of cage-free eggs as part of a project on hen housing systems. "In the U.S., there is no consensus or firm scientific research on whether one type of housing system is better than the other, which leads to a lot of confusion," McDonald's USA adds.
Some of the eggs are cooked fresh, while others are pre-made. The eggs used for the Egg McMuffin are all freshly cracked onto the grill in McDonald's restaurants, according to the company. The scrambled eggs and egg whites are also cooked in the restaurants, but they contain liquid eggs instead of freshly cracked eggs. The folded eggs and the egg that comes in McDonald's sausage burrito are made in factories, flash-frozen and sent to restaurants, where the dishes are warmed before being served.
McDonald's Australia says eggs are held in a warming bin for no more than 20 minutes after cooking. "Like many restaurants, we prepare certain items beforehand, in order to serve our customers in a timely way," the company writes. "Our food is held at a food-safe holding temperature, in the case of eggs, 79°C, until needed for an order. However, we've become really good at anticipating peak times, and cook enough to meet demand. Your McMuffin is assembled only when you order it."
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