Fast food is feeling the squeeze as crowd keeps chasing after price


January 14, 1996|By Shirley Leung

THE FAST-FOOD business has never been rougher. Last month, Hardee's Food Systems Inc. said it would sell its Linthicum-based Roy Rogers unit to cut losses and focus on its core brand. Competition is fiercer than ever as worried &r consumers watch their pocketbooks while choices proliferate. Faced with slower earnings growth, chains such as McDonald's, Burger King and Wendy's are aggressively promoting value-priced products. Boston Chicken is expanding its Boston Markets, offering wider menus. What is the outlook for the fast-food business? What do companies have to do to succeed? Will they ever again see anything like the meteoric growth of previous years? Is overseas expansion a must?

Steven Rockwell

Analyst, Alex. Brown Inc.

When you look at the fast-food segment, it's extremely %o competitive. It's a very concentrated market. McDonald's, Burger King, Wendy's and Hardee's control something of the order of 80 percent of the market. The market ebbs and flows between the four of them.

Hardee's has underperformed. Their new products haven't been very strong. They've been caught by the resurgence of Burger King and Wendy's. We see that Roy Rogers was a brand that for whatever reason could not expand. If it can't expand, there is no reason to stay in business.

A company like Boston Chicken is capitalizing on different demands. Boston Chicken is trying to position itself as an alternative to cooking at home as opposed to fast food. There is the impression that Boston Chicken/Markets is healthier.

They have to be taking some business away from [fast food]. But when Boston Chicken asks where would you have gone if you had not gone to Boston Chicken, 45 percent said they would have cooked at home.

Allan Hickock

Analyst, Piper Jaffray

My overall thought is that 1996 is going to be a tougher year than 1995. And 1995 was a tough year. If things get tough, they get tougher first on those who are already weak. You'll see some fatalities. Hardee's is having a tough time.

The value is here to stay. I don't think consumers have any brand loyalty especially for quick service [foods]. It's like an airline price war. If everyone reduces the ticket, what's the deal? If everyone is doing it, it simply means same market, same customers, just less money to spread around.

Consumers are much smarter. They have a more refined recognition for true value. Hardee's may come out with a 79-cent burger. It's a sixth of a pound. I'm not sure we're interested in tiny burgers. But if I can get a Whopper for 99 cents, then why should I go to Hardee's for a sixth-of-a-pound burger? Is that 20 cents really a hurdle?

Labor is going to be an issue in 1996. it's going to be more scarce, more expensive, less skilled. That's because the prime age group for hourly labor is contracting.

Michael G. Mueller

Analyst, Montgomery Securities

It's an environment where there is not much pricing flexibility. The Roy Rogers sale is an example of Hardee's having to compete in that environment. McDonald's strengths are having more locations than anyone else and going after the children's market. Wendy's and Burger King go after the adults because their menus are perceived as better quality. Hardee's doesn't have a signature burger product.

The foreign markets are much more attractive because they're under-penetrated. But they require a lot of capital. And it's hard to get land, supplies, infrastructure and people to run the business. Unless you're Pepsi -- which owns Burger King -- and you already have good infrastructure, or McDonald's, it's difficult to go overseas. It sounds attractive but in reality it requires capital and investment and you may only be successful in a couple of countries.

Jack Russo

Analyst, A. G. Edwards

The industry hasn't seen this intense competition ever before. You have four chains slugging it out. For someone to increase market share, it's taking from someone else. Jack in the Box and Hardee's have fallen on hard times. With those companies having new management, they might be re-energized in 1996.

Boston Chicken came onto the scene because they fit a niche between fast food and food you can only get at a deli. I don't think it's taking business away from McDonald's. It's probably taking more business away from supermarkets and casual diners. You could feed a family of three at McDonald's for $6. At Boston Chicken, you have to pay $20.

The fast-food industry hasn't raised prices for four to five years. There are not many retail products you can say that about. You can buy a hamburger for the same price -- or even lower than -- you did in 1991. Beef prices are at an all-time low. You see a lot of commercials centered around beef [sandwiches]. It'll be interesting to see what happens when beef prices go up.

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