Though McDonald’s and some other quick-service brands had appeared to be bullet-proof beneficiaries of the trading-down effect, the nation’s economic slump and commodity inflation finally are visibly hurting even well-positioned fast feeders, judging by segment leaders’ latest earnings reports.
While considered relatively recession-proof by some, the quick-service segment is starting to feel the pinch of consumers’ belt-tightening, according to analysts who cite key metrics reported by such players as McDonald’s and Yum! Brands, parent of Taco Bell, KFC and Pizza Hut.
Recent sales weakness seen in the upper echelons of fast food is less severe than that experienced for a long while by casual-dining chains. But the quick-service slowdown nonetheless is forcing big quick-service brands to reinforce their value positioning and rethink other strategies for recession-era marketing.
For example, Taco Bell, one of the early pioneers of the value menu, is revisiting that legacy tactic with the launch of new low-price offerings themed “Why Pay More?” and is poised to roll out the smoothie-like Frutista Freeze beverage line.
McDonald’s, for its part, is expected to take steps to avoid a repeat of what it just reported: its first monthly decline in U.S. same-store sales in five years, a decrease of 0.8 percent for March. However, the Oak Brook, Ill.-based franchisor also reported an overall 2.9-percent increase in same-store sales for the full first quarter, though the slippage at the back end of the period could portend ongoing softness in the second quarter, some analysts feared.
Amid recent uncertainty about its future ownership, Wendy’s late last month reported a 0.1-percent decline in same-store sales for franchised restaurants, which comprise most of the chain, for the quarter ended March 30, leaving the Dublin, Ohio-based franchisor with a 71.8-percent drop in corporate net profit.
While Louisville, Ky.-based Yum fared better in reporting a blended domestic same-store sales jump of 3 percent, its U.S. operating profit fell 5 percent for the quarter ended March 22, and commodity costs mushroomed by $25 million from the same period last year.
Although Yum no longer breaks out financial details by brand, chairman and chief executive David Novak told analysts during a conference call that Taco Bell, of all Yum brands, is best positioned for today’s value-seeking consumer.
“KFC and Pizza Hut are more dinner occasions and more impacted by the consumer environment,” he said.
Taco Bell will be touting its value orientation even more this spring with the new Why Pay More? menu, Yum executives said. The chain has been testing the menu in three markets over the past five months, Novak said, declining to reveal more specifics.
“The brand itself is about value,” Novak said. “‘Why Pay More?’ is a proactive way to strengthen our already strong value positioning.”
McDonald’s and Wendy’s also plan to re-emphasize their value menu items this year, although they will continue to leverage them while featuring premium-priced offerings.
“We will emphasize value,” said Jim Skinner, McDonald’s chief executive. “We’ve always said that our U.S. business is recession-resistant—not recession-proof.”
Ralph Alvarez, McDonald’s president, told analysts that the chain has seen “a little more activity in the Dollar Menu,” now generating between 13 percent and 14 percent of total sales.
KFC will be introducing more lunch items, Novak said, predicting that 2009 will be a better year for the chicken giant than 2008 was. The chain’s new Toasted Wrap, priced at about $1.29, is one new item that bodes well for boosting lunch and between-meal snacks, KFC officials believe.
McDonald’s Skinner, discussing competitors’ apparent copying of his chain’s successful Snack Wrap chicken burrito line, observed that rivals have been mimicking various McDonald’s products for 50 years without harm to the chain.
Wendy’s, too, has introduced such a snack-size item, the Chicken Go Wrap, in three versions priced at about $1.49. Burger King is testing yet another apparent clone of McDonald’s mini chicken burritos, a further sign that QSR chains are seeking to address changing consumer behaviors.
“I think we will see the consumer continually trying to reshape how they order,” said analyst and consultant Dennis Lombardi, executive vice president of Columbus, Ohio-based WD Partners. “QSR chains will continue to see traffic, sales and margin pressure.”
Snacks, along with value offerings, signature beverages and an ongoing emphasis on core sandwiches, also are part of Wendy’s newly enhanced strategic plan, “Doing What’s Right for Our Customers,” the chain’s soon-to-depart chief executive, Kerrii Anderson, said in a statement.
Wendy’s pending new owner, Arby’s parent Triarc Cos., recently indicated it plans to continue expanding breakfast, which Wendy’s introduced last year and has expanded to at least 1,000 locations.
Pizza Hut’s WingStreet co-brand adjunct, a value-price component that’s now part of 1,200 domestic Pizza Hut units, is expected to grow to 2,000 locations by the end of 2009, Novak said, forecasting a number that would make WingStreet the largest chicken wing brand.
Novak also reiterated Yum’s other Pizza Hut reinvestment strategy for a turnaround of the struggling chain, namely its recent launch of delivery of two varieties of pastas sold in 3-pound, six-portion aluminum pans.
“We’re transforming a pizza brand into a home-meal-replacement business,” he said.
Such changes are in the works for all of Yum’s brands, the company indicated, including next year’s planned systemwide rollout of Kentucky Grilled Chicken as a no-extra-cost option for all meal combos and buckets. The nonfried chicken is part of Yum’s long-term plan to boost its entire U.S. business by building “permanent sales layers” and investing in brand repositioning, refranchising and restructuring, the company said.
Both Yum and McDonald’s are selling company-owned units to franchisees to lessen their corporate exposure to commodity cost inflation and economic volatility. Intending to refranchise 500 units this year, Yum expects to own less than 10 percent of its chains’ domestic restaurants by 2010, said Ric Carucci, the company’s chief financial officer.
McDonald’s, whose namesake chain is now 78-percent franchised, refranchised 130 units in the first quarter, with a goal to sell off between 1,000 and 1,500 corporate branches by the end of next year.
Meanwhile, Yum and McDonald’s will be leveraging their large and well-performing international divisions, which continue to outperform U.S. operations. Apart from some presence in Canada, Wendy’s does not have that international advantage.
Skinner said McDonald’s is not feeling the effects of any economic downturns elsewhere in the world, although commodity costs are increasing in Europe, especially in Russia.
McDonald’s same-store sales for the first quarter jumped 11.1 percent in Europe, the highest for that market in its history, and rose 9.4 percent in the chain’s Asia-Pacific/Middle East/Africa region, driven by China and Australia.
Yum’s 31-percent jump in first-quarter profit was mostly attributed to double-digit sales growth in China and other foreign countries. The company plans to add about 1,000 international units this year.
“A lot of opportunity remains in China,” Novak said. He added, for example, that breakfast is served in only 5 percent of the KFC branches there, and delivery is just starting to expand in China, while the desirable 16-to-29-year-old Chinese customer is coming into higher disposable income.
Pizza Huts in China—which operate there in more stylish, casual-dining facilities and with European touches like escargot appetizers and French pastries—are introducing afternoon teatime and seeing increased coffee sales, Novak said.
Consultant Lombardi, noting that strong overseas results are helping chains that have a growing international presence to weather the weak U.S. economy, said, “For McDonald’s and Yum, it’s not a tale of two cities; it’s a tale of three continents.”