ARCHIVE :: DECEMBER 2002 :: BIG BUSINESS

Fast Food
Slows Down

McDonald's Closes
Restaurants as Consumers
Flee Fatty Foods

By SHIRLEY LEUNG
Staff Reporters of The Wall Street Journal

In various contortions to woo customers, industry leader McDonald’s has revamped kitchens to serve hotter food, hired secret shoppers to upgrade service and added more than 40 temporary items—such as a chicken flat-bread sandwich and chocolate banana shake—to jazz up its menu. The company is even investing in other kinds of restaurant formats to capture consumers’ shifting tastes.

But this fall, it hit the pricing panic button. The nation’s No.1 burger chain poured $20 million into advertising its first national value-menu in five years to trumpet eight items for $1 each. The move forced No. 2 Burger King to follow suit with an 11-item menu at 99 cents each.

And the country’s reaction? A big yawn. Froilan Landeros, a 19-year-old student in Chicago, says he hasn’t been to a McDonald’s, Burger King or Wendy’s in four years. He says he doesn’t like the food or the atmosphere. “Burgers and fries can go down the drain,” says Mr. Landeros on his way to have lunch at Potbelly Sandwich Works, a Chicago sandwich chain.

Last month, McDonald’s issued a profit warning to investors, reflecting a continuing trend of declining profit in seven of the last eight quarters. Citing lower-than-expected sales and charges related to restructuring in some international markets, the company said it was closing 175 restaurants outside the U.S., leaving three countries, and cutting 400 to 600 jobs world-wide, including 200 to 250 jobs domestically.

Health Concerns

 Among factors dragging down traditional fast food fare are concerns about its high fat content, which has led to lawsuits against the fast-food players. Plaintiffs accuse the industry of making them obese and susceptible to diseases such as diabetes, heart disease and high blood pressure. (See related article: PepsiCo Tries to Make Junk Food Healther.)

Meanwhile, the emerging category of “quick casual” restaurants, including chains such as Chipotle Mexican Grill (majority-owned by McDonald’s), Cosi and Panera Bread—are attracting more customers. As many as half of fast-food patrons eat at such chains, which generally have higher-quality food but still no table service, says Dennis Lombardi, a food industry consultant. Quick-casual customers spend about $6 to $8 per average check as opposed to fast food’s $3 to $4 average check, Mr. Lombardi says.

Industry experts had assumed the quick-casual category attracted predominantly aging baby boomers who could afford higher costs. But in fact, quick-casual concepts appeal largely to 18-to 34-year-olds. About 37% of fast-casual customers are in this age bracket—a demographic that typically consumes the most fast-food.

“I’m spending more money to stay healthy,” says Maggie Thaxton, a 27-year-old Chicago teacher who frequents Quizno’s Subs. The sandwich chain has about 1,800 U.S. stores, where sandwich prices are between $4 to $7.

Indeed, the price wars actually may be backfiring on traditional fast-food stores. McDonald’s franchisee Irwin Kruger says the dollar-value menu isn’t increasing sales at his seven New York City restaurants, but rather squeezing profit, because he is selling discounted items. For now, though, he says he’s not concerned because part of McDonald’s value strategy was to cripple rival Burger King.

Burger King, with 18% of U.S. burger market share, said its sales are weak because the price war is dragging down the whole fast-food category. Wendy’s says it doesn’t see its steep price cuts as a problem. It says its 99-cent menu has been profitable for 13 years because customers buy full-price items in combination with the discounted items.

‘Playing to Win’

 But some chains feel pressured by the discounts because customers are simply shifting from one brand to the other. For example, Burger King says it is losing customers to McDonald’s, whose Big ‘N’ Tasty and McChicken sandwiches, selling for $1 each, are twice as large as any sandwich on Burger King’s 99-cent menu.

McDonald’s says it sees no sharp drop in demand for its burgers, fries and other fare. “Twenty-two million customers a day tell us that Americans still believe that McDonald’s is a welcome part of their daily meal options,” says Mike Roberts, president of McDonald’s USA. “No matter what the trends might be, McDonald’s is playing to win in a competitive marketplace. McDonald’s has strengths no one else can match when it comes to expanding the reach of our brand to bring in even more customers.”

Even so, fast-food chains are very aware of changing consumer tastes. McDonald’s is investing in upscale chains such as Chipotle and British sandwich chain Pret a Manger. Wendy’s also has diversified with coffee-shop chain Tim Hortons and Mexican chain Baja Fresh. And just last month, Jack in the Box announced it is entering the convenience-store business with its own brand.