The restaurant industry had some good news earlier this summer, when restaurant traffic seemed to stabilize and stock prices increased. We chatted with Zacks senior restaurant industry analyst
Ann Northrop, CFA to see if some positive sentiment remains in the group, or perhaps just for a few stocks.
It's been about a year since the U.S. economy began softening under fears of a mortgage-led credit crisis. In what ways has the restaurant industry been dealing with this issue?
Restaurant operators are being squeezed by declining customer traffic and rising food and labor costs. To stem the traffic drain, most operators are running value promotions and have stepped up advertising while raising prices. Restaurants at all ends of the spectrum are running value promotions, from the $1 value menu at many quick service operators to Morton?s (MRT) ?steak and seafood for two? promotion at $99.
Because lunch has generally been the hardest-hit day-part, many casual dining chains have added lunch specials to the menu in an effort to reinvigorate sales. At the same time, these operators are rolling out price increases, often in their premium items, such as smoothies or premium beef items. This ?barbell? pricing strategy is designed to retain the more price-sensitive customer, while increasing average price and supporting margins.
Are other quick-service restaurant (QSR) chains able to reinvent themselves the way McDonald's has recently, or is that company a special case?
If by reinvent, you mean change the public perception of fast food being unhealthy, then the answer is yes. Most quick service operators have switched to trans-fat free oil in recent years and offer a range of salads and non-beef options. Yum! Brands? (YUM) Taco Bell recently added its Fresco menu, which consists of nine items with less than nine grams of fat. KFC?s (also a Yum! Brand) U.S. business is hurting because it didn?t respond to consumers? long-running shift away from fried foods. It?s now test-marketing a line of grilled sandwiches and salads and expects to launch them nationally in the first half of 2009.
But McDonald?s (MCD) has done the best job of marketing to mothers. The company has managed to defuse an avalanche of negative publicity from popular books and documentaries linking fast food with childhood obesity. It not only added healthier options to its Happy Meals, but ran an inspired PR campaign to change its image.
