Is that a donut in my fry cup or a french fry in my donut bag? It depends which quick serve restaurant you’re leaving. Industry sources report that McDonald’s (NYSE: MCD), the famed burger flipper and home of the Big Mac, will offer Donut Sticks on its breakfast menu for a limited time beginning in January.

If so, it’s a clear case of how imitation is the best form of flattery. This past summer Dunkin’ Brands Group (NSDQ: DNKN) enjoyed wild success with its Donut Fries, which the purveyor of Dunkin’ Donuts described as “individual pieces of delicious, buttery croissant style donut dough that are tossed in cinnamon sugar and served warm.”

The Shrinking Pie

Don’t look now but there’s a fight brewing in the fast food line. Traditional fast food chains like McDonald’s, Burger King and Dunkin are killing each other for a shrinking piece of a stagnant pie.

This donut fry copycat promotion is yet another example of the entrenched fast food chains beating each other over the head for customer traffic.

In addition to the donut fry ploy, the giants of the industry recently launched the following promotions to lure in foot traffic away from competitors:

• Restaurant Brands International (NYSE: QSR), the parent company of the Burger King, Popeye’s Louisiana Kitchen, and Tim Hortons chains, initiated a one cent Whopper deal. The trick is that the customer needs to be within 600 feet of a McDonald’s restaurant. A definite kick in the gut for stealing traffic.
• Many McDonald’s regional stores have retaliated by continuing their $1 “any-size” drink promotion which began last summer. Wendy’s (NSDQ: WEN) is caught in the crossfire between its two larger competitors.
  

The quick-serve restaurant industry is barely growing. According to industry source Tdn2K, traffic at fast food restaurants fell almost 2% in the month of November, the most recent data available. This traffic number is slightly worse than the 1.7% drop in the prior month.

While higher average check sales brought the total sales number up to slightly positive, there is a big problem getting customers in the door.

It’s certainly not an issue that consumers are eating out less. The problem is that they are not interested in what’s on the menu. The problem is two-fold: consumers prefer healthier options and those options are expanding quickly. Gourmet veggie and salad chains like Dig Inn and SweetGreen are taking share at the high end, and Chipotle (NYSE: CMG) and Boloco are taking the mid-level consumer looking for something slightly healthier.

Add to slowing sales, labor inflation due to climbing minimum wage rates and high staff turnover, and you’ve got a recipe for disaster. In a tight labor market, workers are opting for better work conditions in retail and administrative roles. Increasing turnover, higher wages, and elevated customer expectations are pushing expenses upwards.

There are only a few publicly traded ways to make a bullish play on these new fast-growing chains. Chipotle is public, but its relatively high valuation reflects a company on the right track after overcoming its food-borne illness problems. Boloco is private. SweetGreens just completed a round of private equity financing that values the company at $1 billion and Joe & the Juice, a chain of 300 juice bars, hopes to go public this year.

Any healthy options that McDonald’s and crew are offering are not enough to compensate for the decline in their standard fare. Even the burger space is not safe, with high-end competitors like ShakeShak (NSDQ: SHAK) and Smashburger enticing customers with their gourmet burgers.

Instead of betting that nutritious options will win, I made a recent bet that the high-calorie, fat-laden options would lose. In my premium trading service Profit Catalyst Alert, three bearish option trades in the burger world delivered healthy profits of 57%-79% in short order.

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