Chicken chains change execs, branding to compete

Feathers have been flying in the quick-service chicken sector as two major brands retool under new ownership, a third adjusts to a change in executive leadership and all struggle to compensate for soaring commodity costs and endlessly spiraling gas prices that are keeping consumers at home.

Industry pundits who earlier had forecast that quick-service players could expect to benefit from cash-strapped diners’ trading down from casual-dining brands are having to eat their words as consumers tighten the purse strings across the board, notably at dinner.

A study conducted by the Port Washington, N.Y.-based NPD Group found that quick-service chicken chains as a group suffered a 4-percent decline in dinner traffic for the 12-month period ended February 2008. Most consumers reported that financial concerns were the chief reason for diminished frequency.

“This is probably the most challenging macroeconomic environment I’ve experienced in my entire career,” says Stephen Carley, president and chief executive of El Pollo Loco in Irvine, Calif. “You have to go back to 1979 or 1980 to find similar consumer malaise and a stunning rise in commodity prices.”

Dick Lynch, the chief marketing officer of AFC Enterprises Inc., the Atlanta-based parent of 1,900-unit Popeyes Chicken & Biscuits, agrees that the environment is “challenging,” adding that the economic “headwinds facing the business make it difficult to operate.”

“The higher food costs and gas prices are increasing the pressures on franchisees,” Lynch says.

Popeyes is about 97 percent franchised and announced in March that it would sell its company-owned locations “to qualified buyers.”

In the face of intense marketplace pressures, two of the sector’s mainstays, Boston Market and Bojangles’ Famous Chicken ‘n Biscuits, were acquired by new owners in 2007. At the same time, Church’s Chicken named a new chief executive along with several other key executives. Observers note that those events could contribute to some dynamic changes in the quick-service chicken roost down the road.

CHICKEN CHAINS RANKED BY U.S. SYSTEMWIDE SALES

However, one of the most pressing challenges facing the segment remains runaway commodity costs. According to the National Restaurant Association, food prices climbed 15.5 percent between February 2006 and February 2008, resulting in billions of dollars in increased food cost for restaurateurs.

In particular, poultry prices have been rising as well, propelled by the increasing price of corn—more than a quarter of which is now being channeled into the production of the biofuel ethanol.

“Producers like to say that chicken is basically corn with feathers, and it’s just getting more expensive to raise them,” says John Barone, president of Market Vision Inc., the Fairfield, N.J., firm providing commodities analysis and purchasing support services for restaurant chains.

The cost of chicken has been rising steadily since 2006, despite increased overseas demand for dark meat, which has been helping to mitigate domestic price hikes, Barone notes. The price of whole broilers rose from 64 cents a pound in 2006 to 76 cents a pound in 2007, according to the U.S. Department of Agriculture.

The USDA also is projecting that whole broilers will rise to 80 cents a pound by the end of 2008 as a result of decreased corn production. Prices are forecast to gain a further 3 cents in 2009, Barone says.

In the meantime, quick-service chicken chains are battling back against a difficult economic environment that has resulted in declining same-store sales for some. Lynch calls the appointment of KFC veteran Cheryl Bachelder as AFC chief executive and Popeyes’ president “game-changing.”

CHICKEN CHAINS RANKED BY GROWTH IN U.S. SYSTEMWIDE SALES (Year-to-year percentage change)

Bachelder, who was appointed to the new posts last November, has put together a new team that includes chief operating officer Ralph Bower and Lynch.

Lynch said a number of major changes are in the Popeyes’ pipeline for 2008, including a major new-product initiative, new menu boards, a new brand identity push and a complete advertising overhaul led by a new ad agency. Popeye’s also will continue to emphasize its “Bonafide” campaign, which highlights its bone-in chicken product line.

Bower says the chain already has introduced many operational innovations, including a Guest Experience Monitor, an integrated voice response system that helps measure guest satisfaction, and a Metric Moving Scorecard, that gauges such things as guest experience, employee turnover, sales and profits at the unit level. The scorecard enables Popeyes to discontinue the use of mystery shoppers.

The chain also plans to increase the frequency of food-safety assessments at every outlet from once a year in 2007 to about four times a year in 2008.

Other major changes rippled across the sector over the past year. In September 2007, Bojangles’ franchisee Jerry Richardson partnered with Charlotte, N.C.-based private-equity firm Falfurrias Capital Partners to acquire a 60-percent controlling stake in the 410-unit chain. As one of the first changes, Richardson’s protégé Randy Kibler was named to replace Joe Drury as chief executive.

The regional brand, which recently reported its 58th consecutive month of same-store sales increases, is positioning itself “to come out from under the radar,” says executive vice president Eric Newman. With most of its locations clustered in the Southeast, Bojangles is stepping up expansion, opening an average of one company-owned or franchised outlet a week. Newman says the company has about 46 franchised openings in the pipeline and 10 company units slated to debut by the end of 2008.

Since the acquisition, Bojangles has been sharpening its growth plans under the theme, “One brand, one company, one focus,” Newman says. While it is focusing on its core menu of chicken, biscuits and iced tea, the chain also recently launched a line of salads systemwide.

Popeyes also will continue to emphasize the breakfast daypart, which accounts for 40 percent of its business.

The past year also saw the sale of the 600-plus-unit Boston Market by McDonald’s Corp. to Boca Raton, Fla.-based Sun Capital Partners. Following the acquisition, Sun Capital appointed Rick Arras to the chain’s chief executive post, who in turn, made additional lineup changes to Boston Market’s marketing and operations team.

In an effort to get the brand back on a growth track, the new executive team debuted several products in 2007 and 2008, a tactic that hadn’t been pursued since 2006, said Angela Procter, senior director of communications. New items include the Chipotle Meatloaf, available in individual and family portions, and Tuscan Rotisserie Chicken, which also includes such side dishes as garlic spinach and four-cheese cavatappi.

CHICKEN CHAINS RANKED BY NUMBER OF U.S. UNITS

A barbecued chicken entrée also debuted, along with side dishes like vine-ripened grape tomato and asiago cheese salad.

The Golden, Colo.-based brand continued to close some underperforming locations over the past year, but Procter says growth is on the horizon.

“We’re looking to expand again,” she says.

At its peak, Boston Market had more than 1,000 outlets. While the brand has aired several new television spots, it plans to redesign its website and focus on its corporate chefs.

CHICKEN CHAINS RANKED BY GROWTH IN NUMBER OF U.S. UNITS (Year-to-year percentage change)

Segment leader KFC, which is owned by Louisville, Ky.-based Yum! Brands Inc., is hoping to overcome sales weaknesses—notably in the lucrative dinner daypart—by overhauling its 60-year-old image and giving franchisees the option of rebranding stores as “Kentucky Fried & Grilled Chicken.” The move comes as KFC is poised to roll out a new nonfried chicken variety.

That new brand is already being used during test marketing of Kentucky Grilled Chicken as a no-extra-cost alternative in meal combos and variety buckets. While the grilled items are available with standard flavoring, other varieties like rosemary-citrus, orange-chipotle and honey-barbecue are in test. Grilled-chicken snack products also are being tested.

The items will be prepared in a fully automated, high-temperature convection-steam oven, with stripes seared on a non-stick grill plate.

The company said two TV commercials for the items aired in Colorado Springs, Colo., helped drive sales in the area, although they weakened after the spots stopped running.

The chain previously offered nonfried products in the Rotisserie Gold line, but that was discontinued in 1996. KFC continues to feature Tender Roast items that are available in a sandwich, a Twister wrap and salad topping.

KFC also plans to debut additional lunch items in the future, and is forecasting a positive reception for its new Toasted Wrap, priced at about $1.29.

CHICKEN CHAINS RANKED BY ESTIMATED SALES PER UNIT

While the marketplace remains challenging, most of the major chains are continuing to expand. El Pollo Loco added 10 company and 20 franchised stores in 2007, and expects to open 10 to 12 more company and 30 franchised locations in 2008, Carley says. By the end of the year, El Pollo Loco will have stores in 18 states, he adds.

The 400-unit chain also has a number of new products in the pipeline, including a limited-time-only marinated, flame-grilled chicken sandwich topped with fresh guacamole, pico de gallo and lettuce and served on a traditional Mexican telera roll. It is priced at about $4.29.

Carley says the brand is looking at other new products and intends to promote certain menu items with good margins to help “protect profitability.”

To refine and manage food cost, EPL also launched several computer-driven management tools for the restaurants, he says.

“We can’t pass price increases on through to the customers,” he says. “That will force them into the grocery stores. So we’re also looking at portion sizes and recasting various meal components without giving them sticker shock.”

Carley says EPL also will enter its seven-year remodeling cycle with several new prototypes that feature new signage, logos, upgraded interiors and contemporary colors.

With an 8.47-percent same-store sales increase under its belt in 2007, Atlanta-based Chick-fil-A embarked on what is being touted as the chain’s most aggressive menu overhaul in its history. Beginning in May, the 40-year-old brand debuted a number of new or reformulated items, including a coffee-caramel milk shake, a limited-time-only selection that will be available through Aug. 2.

The chain unveiled new entrée salads, including a char-grilled chicken and fruit salad with harvest nut granola topping. Chick-fil-A’s four existing entrée salads also will be served in larger bowls.

Meanwhile, the chain will be serving its three Cool Wrap items in a new multigrain flat bread with green-leaf lettuce. Don Perry, Chick-fil-A’s vice president of communications, says one of the surprise successes of the launch was its new chicken salad sandwich. “We’ve had chicken salad since the chain began,” he says, “but we made improvements. We’re using new bread [and] chunkier chicken, and we changed the recipe slightly. The response has been tremendous. We’re selling three times as much as we used to sell.”

One of the key rollouts is the new iteration of Chick-fil-A’s Chick-n-Strips product, which are now 50-percent larger, Perry says. Available either in a three- or four-count entrée size, the strips can be paired with a new, smoky mustard dipping sauce.

Prices on the new products are expected to rise somewhat, Perry says.

“But that just reflects the necessary costs involved,” he says. “We’re just trying to do the normal things and deal with price adjustments. I wish we could be like the gas stations—one price in the morning, another price in the afternoon. But we have a hard time passing on a penny increase.”

Chick-fil-A expects to open 90 new stores in 2008, chiefly through its stand-alone units, which average about $2.8 million each in sales.

Atlanta-based Church’s Chicken also is charting expansion plans, although much of its focus is on international growth. Chief marketing officer Farnaz Wallace says the chain has debuted in seven new countries over the past year, including Russia, the United Arab Emirates, Jordan and Saudi Arabia. Overseas stores operate under the Church’s brand as well as Texas Chicken.

In January 2008 Church’s entered the United Kingdom through the acquisition of a regional chain called Dixie Chicken. Church’s intends to have 40 stores in the U.K. by the close of 2008 through conversions and new unit openings, Wallace says.

The company currently has about 425 international locations in 18 countries. Plans call for new openings in Australia, Malaysia, Turkey, Qatar and the Ukraine with the next few years.

“International holds great promise,” Wallace says.

Church’s also is expanding domestically and plans to exceed 70 openings this year. It is rolling out a new modular prototype that is completely factory-built and is expected to reduce opening costs, Wallace says. The chain also intends to launch new 350-square-foot kiosks for nontraditional sites in areas that are fully penetrated, she says.

CHICKEN CHAINS RANKED BY TOP 100 MARKET SHARE (Percentage of aggregate sales of chicken chains in Top 100)

Church’s also has embarked on a two-pronged menu strategy that calls for the reintroduction of favorites like Spicy Chicken and Country Fried Steak together with the launch of new items. Wallace says rice bowls will begin testing in August, and will be available in two or three variations.

Top 100: Part one of a two-part report