Value meals, franchised business models help QSRs withstand economic slowdown

So far the largest quick-service chains have been able to fend off the one-two punch of depressed consumer spending and rising costs by rolling out value deals to spark traffic and relying on mostly franchised business models to insulate themselves from food and labor cost increases.

But will that formula work if the economy gets even worse? Most quick-service operators and analysts answer with a resounding yes.

In a report that downgraded the entire restaurant sector largely because of a weakening U.S. economy, Bear Stearns & Co. Inc. restaurant analyst Joe Buckley said his research team continues to favor quick-service restaurant chains “where same-store sales and traffic have held up well and franchised business systems offer partial insulation from high food and labor costs.”

In a Jan. 2 report, Buckley said, “Quick-service stocks dominated the short list of winning restaurant stocks in 2007, and we think they can do well again in 2008.”

Still, a successful 2008 for quick-service chains won’t be accomplished without continued product news and operational changes, analysts concluded. While such chains as McDonald’s, Burger King, Jack in the Box and Sonic have benefited from consumers’ trading down from higher-priced segments, they also have found success with longer operating hours, expanded daypart offerings, and improved menu quality and speed of service, analysts said. At Sonic, the 3,350-unit drive-in chain operated or franchised by Oklahoma City-based Sonic Corp., a moment of weak sales in September was met head on with a drink promotion aimed to boost traffic. The company introduced systemwide half-priced “Happy Hour” drinks from 2 p.m. until 4 p.m. The move apparently worked, as the company reported Jan. 3 a same-store sales jump of 2.1 percent for its most recent quarter and said the promotion “has been particularly effective not only at stimulating overall sales growth, but also increasing traffic.” The company also predicted a positive 2008.

Wendy’s, the No. 3 burger chain owned by Dublin, Ohio-based Wendy’s International Inc., has been unable to capitalize on the quick-service sector’s boom, mainly because of its failure to make moves like Sonic and its other competitors, analysts contended. On Jan. 4, the company reported a U.S. same-store sales dip of 0.8 percent at corporate locations and a 0.2-percent increase at franchised units for the fourth quarter.

Analyst Steven Kron at Goldman Sachs said Wendy’s underperformance is mainly because of the chain’s “late arrival” to the “key areas” of quick-service strength, including breakfast, value items and tiered menu pricing.

Wendy’s kicked off 2008 with a 99-cent double cheeseburger dubbed the Stack Attack, and it has increased certain menu prices in various markets and continued to introduce breakfast throughout its 3,600-unit system. Still, the chain’s attempts to mirror competitors’ already-established value menus or breakfast offerings may not be enough, according to analyst John Ivankoe at J.P. Morgan Securities Inc.

“Despite increased marketing and new products, Wendy’s is losing relevance relative to the competition,” he noted.