McDonald's new drink line should worry Sonic


McDonald's(NYSE: MCD) seems to do things in fits and starts, and while getting a number of things right, it also seems to do other things amazingly wrong. Lately, it looks like it's firing on all cylinders.

It's not so much two steps forward, one step back, but at times, it does appear to be a scattershot approach to correcting an ailing business. However, McDonald's latest shot is right on target, and it ought to give rival Sonic(NASDAQ: SONC) something new to worry about.

I'll drink to that

Recently, Nation's Restaurant News reported McDonald's was introducing new slushie drinks under the Minute Maid brand. Available in three flavors -- orangeade, fruit punch, and cherry limeade -- it's clear that its fast-food rival was uppermost in mind when it dreamt up the promotion as slushie drinks form a big part of Sonic's menu, with the cherry limeade having been on Sonic's menu for decades.

The drive-in restaurant is suffering a severe decline in sales after years of strong, double-digit growth. Sonic can't seem to find the right combination to click with customers, and in its fiscal second-quarter earnings report last month, the chain reported a 25% drop in revenue, though much of that was due to the refranchising, or the selling of company-owned stores to franchisees. More worrisome is the continued drop in same-store sales, which fell 7.4% from a year ago, a move Sonic blamed on a very competitive environment.

Since peaking in the fourth quarter of 2015, comps growth has steadily declined, finally turned negative late last year, and now seems to be accelerating down.

PHOTOS: McDonald's through the years:

32 PHOTOS
McDonald's through the years
See Gallery
McDonald's through the years
The McDonald's Museum is a replica of the first corporate McDonald's restaurant, opened here April 15, 1955, after the franchise was acquired from founders Maurice and Richard McDonald.
circa 1955: Exterior view of the first McDonald's fast food restaurant with its neon arches illuminated at night, Des Plaines, Illinois. (Photo by Hulton Archive/Getty Images)
The exterior of a McDonald's fast food restaurant is shown in this August 1970 photo. The 'Speedee' McDonald's in Downey, California, named for the original chef logo, the third restaurant built by the McDonald brothers Dick and Maurice has been designated a national landmark and celebrated its 50-year anniversary on August 18, 2003 in Downey, California. (Photo by Hulton Archive/Getty Images)
Restaurants McDonald. March 23, 1974. (Photo by Arty Pomerantz/New York Post Archives / (c) NYP Holdings, Inc. via Getty Images)
An employee makes notes at the counter in McDonald's, Southfield, Michigan, USA, July 1978. (Photo by Barbara Alper/Getty Images)
A McDonald's restaurant in Vienna, Austria, July 1980. (Photo by Barbara Alper/Getty Images)
Fast food also known as the junk food phenomenon arrived in France, the country of gastronomy in the late seventies early eighties. Hamburgers, cheeseburgers, french fries, Coca Cola or Pepsi and milk shakes with the interior decoration and design of the premises in the same atmosphere as in the USA. The beginning of fast food in France started with such companies such as Whataburger, Love Burger, Manhattan Burger, Big Boy, Popeye Burger, Freetime, Burger King and Mcdonald's. Employees at Burger King. (Photo by John van Hasselt/Corbis via Getty Images)
Fast food also known as the junk food phenomenon arrived in France, the country of gastronomy in the late seventies early eighties. Hamburgers, cheeseburgers, french fries, Coca Cola or Pepsi and milk shakes with the interior decoration and design of the premises in the same atmosphere as in the USA. The beginning of fast food in France started with such companies such as Whataburger, Love Burger, Manhattan Burger, Big Boy, Popeye Burger, Freetime, Burger King and Mcdonald's. Employees at Whataburger. (Photo by John van Hasselt/Corbis via Getty Images)
Interior view of a McDonald's restaurant, showing an employee sweeping the floor and a group of patrons eating, Chicago, Illinois, circa 1987. (Photo by Antonio Perez/Chicago History Museum/Getty Images)
123241 05: A Worker Takes An Order From A Customer In China's First Mcdonald's Restaurant April 23, 1992 In Beijing, China. Mcdonald's Opened Its World's Largest Restaurant In The Busiest Shopping District Of The Capital. (Photo By Forrest Anderson/Getty Images)
(AUSTRALIA & NEW ZEALAND OUT) A casual staff member at a McDonald's restaurant, 21 May 1996. AFR Picture by LOUISE KENNERLEY (Photo by Fairfax Media via Getty Images)
388587 04: Workers try and organize counter space inside a new McDonald's McCafe coffee shop May 1, 2001 in Chicago, the first McCafe located in the United States. McCafe was first introduced in Australia in 1993 and there are now almost 300 of the coffee shops located in 17 countries. (Photo by Tim Boyle/Newsmakers)
NEW YORK - SEPTEMBER 3: A man walks out of a McDonald's restaurant on First Avenue September 3, 2002 in New York City. McDonald's announced plans to use a new cooking oil for its french fries that it says will cut in half the trans-fatty acid levels while increasing the amount of the more beneficial polyunsaturated fat. (Photo by Mario Tama/Gettty Images)
Marquee of a McDonald's restaurant in Times Square. (Photo by James Leynse/Corbis via Getty Images)
DOWNEY, CA - AUGUST 18: An employee serves up french fries at the world's oldest-operating McDonald's fast food restaurant on its 50-year anniversary on August 18, 2003 in Downey, California. This 'Speedee' McDonald's, so named for the original chef logo, was the third restaurant built by the McDonald brothers Dick and Maurice and is a national landmark. (Photo by David McNew/Getty Images)
DALLAS, TX - MAY 6: The new Happy Meal for adults is seen at a McDonald's restaurant May 6, 2004 in Dallas, Texas. The meal, which features a salad, bottled water, a Stepometer and booklet for excercising tips, will be available nationwide this Tuesday. (Photo by Mike Fuentes/Getty Images)
UNITED STATES - APRIL 15: A line of customers stretches around the corner at the grand re-opening and 50th anniversary celebration of the opening of the first McDonalds's at the McDonald's Restaurant in downtown Chicago, Illinois Friday, April 15, 2005. The first McDonald's opened in Des Plaines Illinois on April 15, 1955. (Photo by Tannen Maury/Bloomberg via Getty Images)
Tokyo, JAPAN: McDonald's Japan employee Noriko Daigo (C) presents the company's new salad mac menu, 'Tomato Grill Chicken Sand', 'Mix Berry Yogurt' and 'Salad dish Grill Chicken' at its restaurant in Tokyo, 19 April 2006. McDonald's will serve the menu starting 13 May. AFP PHOTO / TOSHIFUMI KITA (Photo credit should read TOSHIFUMI KITAMURA/AFP/Getty Images)
MELBOURNE, AUSTRALIA - AUGUST 29: A sign for the new Happy Meal is displayed at the McDonald's restaurant in Collingwood on August 29, 2006 in Melbourne, Australia. The new Happy Meal is a low fat alternative to the fast food chain's traditional Happy Meal. Childhood obesity is a major health issue in Australia and has tripled in the last 20 years with one in six Australian children classed as obese. (Photo by Kristian Dowling/Getty Images)
AUSTRALIA - OCTOBER 18: A McDonald's restaurant sign is cast in light at sunset on a road between Canberra and Sydney, Australia, Wednesday, October 18, 2006. (Photo by Jack Atley/Bloomberg via Getty Images)
Munich, GERMANY: A McDonald?s Big Mac and chips are pictured at a McDonald?s restaurant beside their headquarters in Munich, southern Germany 27 February 2007. Bane Knezevic (not in picture), president of the western division of McDonald's Europe and chairman of McDonald's Germany reported at a press conference that Mcdonald's turnover had increased by 6,2 percent in 2006. AFP PHOTO DDP/JOERG KOCH GERMANY OUT (Photo credit should read JOERG KOCH/AFP/Getty Images)
UNITED STATES - APRIL 22: People enter a McDonald?s restaurant in Brooklyn, New York, U.S., on Tuesday, April 22, 2008. McDonald's Corp., the world's largest restaurant company, said first-quarter profit rose more than analysts estimated after record European revenue gains outweighed the first drop in U.S. comparable-store sales in five years. (Photo by Tom Starkweather/Bloomberg via Getty Images)
NEW YORK - JULY 18: A McDonald's restaurant sign lists calorie counts July 18, 2008 in New York City. New York is now the first city in the country to implement a law forcing chain restaurants to post the calorie count of each food next to the items on their menus. (Photo by Chris Hondros/Getty Images)
A McDonald's employee serves a burger and a carton of french fries at one of the company's restaurants in London, U.K., on Monday, Feb. 1, 2010. McDonald's Corp., the world's largest restaurant company, plans to increase its number of Russian outlets by 20 percent this year to capitalize on its fastest growing market in Europe. Photographer: Jason Alden/Bloomberg via Getty Images
The world's biggest McDonald's in the Olympic Park during the London 2012 Olympics. or the past 40 years McDonalds has been the Official Restaurant Olympic Games. All official sponsors they have paid $957 million to the IOC for the 19 days competition. Hundreds of food outlets at Olympic venues have been forced to take chips off the menu, because of a demand from sponsor McDonald's. Olympic chiefs banned all 800 food retailers at the 40 Games venues across Britain from dishing up chips because (Photo by In Pictures Ltd./Corbis via Getty Images)
SAN RAFAEL, CA - MARCH 12: Customers order food at a McDonald's restaurant drive thru on March 12, 2013 in San Rafael, California. McDonald's has retained its number one ranking in both global and domestic sales and continues to be the largest single restaurant brand in the world with company-store sales last year of $4.53 billion and franchise-store sales of $31.063 billion for a domestic total of $35.59 billion. (Photo by Justin Sullivan/Getty Images)
A customer walks into a McDonald's Corp. restaurant in Hong Kong, China, on Tuesday, July 16, 2013. McDonald's Corp. is scheduled to release earnings data on July 22. Photographer: David Paul Morris/Bloomberg via Getty Images
DES PLAINES, IL - OCTOBER 24: In this photo illustration, items from a McDonald's restaurant are shown on October 24, 2013 in Des Plaines, Illinois. McDonald's has announced it will make changes to its low-priced Dollar Menu, which includes items like coffee, small fries, hamburgers and apple pies. The new menu, dubbed the Dollar Menu and More, will offer some higher priced options such as the grilled Onion Cheddar Burger and a McChicken sandwich. (Photo Illustration by Scott Olson/Getty Images)
This photo made on April 8, 2014 in Guantanamo Bay naval base and Joint Detention Facility, shows the McDonald's fast-food restaurant chain sign outside their first and only restaurant on Cuban soil. The restaurant was open in 1986 with a purpose to support morale, welfare and recreation activities for service personnel and their families. AFP PHOTO/MLADEN ANTONOV (Photo credit should read MLADEN ANTONOV/AFP/Getty Images)
LONDON, ENGLAND - SEPTEMBER 9: The interior of a McDonald's fast food restaurant, located near Westminster Bridge under the London Eye, is viewed on September 9, 2016, in London, England. The collapse of Great Britain appears to have been greatly exaggerated given the late summer crowds visiting city museums, hotels, and other important tourist attractions. (Photo by George Rose/Getty Images)
McDonald's Corp. chicken nuggets are arranged for a photograph in Tiskilwa, Illinois, U.S., on Friday, April 15, 2016. McDonald's Corp. is expected to report quarterly earnings on April 22. Photographer: Daniel Acker/Bloomberg via Getty Images
HIDE CAPTION
SHOW CAPTION
of
SEE ALL
BACK TO SLIDE

Stuck in the slow lane

That competition came not least from McDonald's, which exhibited newfound strength from the introduction of all-day breakfast at its restaurants two years ago, though it's slipped in more recent periods. It also came from Wendy's and Burger King, who, together with McDonald's, began competing against one another with discounted bundled meal packages that proved popular with hungry customers. That Sonic's woes began around the same time the burger joints became very promotional is not surprising.

Yet McDonald's has finally seemed to realize it needs to really focus on the value end of its menu, and as such, it has begun a series of initiatives to offset its own weak customer traffic, including discounting drinks, such as offering any size soda for $1 and McCafe specialty drinks for just $2. The recently unveiled slushie drinks show the importance McDonald's is placing on beverages to help attract customers.

As the NRN industry site noted, McDonald's has seen a half-billion transactions vanish over the past five years, and though CEO Steve Easterbrook has tried to somewhat emulate fast-casual chains with some of the changes he's made to transform the restaurant into a "modern, progressive burger company," it's been rival fast-food hamburger joints that have really stolen most of its customers.

Sonic boom

The drink addition is a smart move for reasons other than going after a popular menu item from an ailing rival. Apparently, McDonald's doesn't need to add any new equipment since the machines used to make the McCafe drinks like smoothies and frappes can make slushies, too. In the past, franchisees have balked at implementing some of the ideas McDonald's headquarters devised because it required they buy expensive equipment with little guarantee of a payoff.

While Sonic might not have seen the slushie introduction coming, it knew there would be a big discount drink promotion coming, and it prepared for it by the development of a new line of frozen custard concretes as well as offering discounts on its slushie drinks. Still, it's apparent Sonic is feeling the heat, and with a new McDonald's beverage aimed directly at its menu, investors in the drive-in chain may need to be worried about what will come next.

10 stocks we like better than McDonald's
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now...and McDonald's wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of April 3, 2017.

Rich Duprey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Read Full Story

Can't get enough business news?

Sign up for Finance Report by AOL and get everything from retailer news to the latest IPOs delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.