Restaurants: A recipe for change

Can fast food keep up with the times?

It’s been more than half a century since McDonald’s Corp. served up its debut burger to what would become the first of billions of customers around the world. But times — and waistlines — have changed. Consumers are demanding lower-fat alternatives to the greasy treats that have become diet staples. Prices for foodstuffs have been rising. Labour costs have been on their way up. And North American legislators are beginning to crack down when it comes to artery-clogging trans fats and food labelling. Can fast food survive these leaner times?

Some big chains are taking a hit. Units in Vaughan, Ont.–based Priszm Canadian Income Fund — one of Canada’s largest quick-service restaurant trusts, whose offerings include KFC, Taco Bell, Pizza Hut and Long John Silver’s — have plunged nearly 50%, to about $6.80, from a year ago; in advance of Prizm’s mid-October Q3 results, analysts had been predicting distribution cuts as high as 50%. “We are seeing some real shifts within the definition of fast food,” says National Bank Financial’s Gareth Tingling. “The KFC brand doesn’t have a very wide envelope of permission. Would you eat fried chicken in the morning?”

To stay in the game, says RBC Capital Markets equity research analyst Walter Spracklin, North American fast-food operators will have to offset future cost increases by generating higher revenues through same-store sales growth. There are three main ways to accomplish this: increase prices, drive more traffic through stores, in part by expanding menu offerings, and up-sell customers on new, more expensive products. A secondary, probably more risky strategy is selling items not traditionally associated with a restaurant’s brand. McDonald’s, for example, recently jumped into the gourmet coffee business, adding a higher-quality cup of joe to one of many items its customers can pick up along with breakfast sandwiches and hash browns. Pizza Pizza, with 531 restaurants located mainly in Ontario, has also introduced higher-priced, more exotic pizza toppings — think Mesquite chicken and mango — in a bid to spice up its offerings and bump up its bottom line.

If prices at the pump remain high, and economic malaise in the United States spills over into the Canadian economy, quick-service restaurant operators here will also have to work harder to convince customers to spend hard-earned dollars on discretionary items such as burgers and fries. As a result, you can expect to see more money spent on branding, spiffy new stores renovated with specific demographic groups in mind, and a more proactive approach to health concerns. A&W, for example, recently switched to trans-fat-free oil; it also redesigned most of its 680 Canadian restaurants with the retro-like feel of a 1960s diner, to appeal to the nostalgic side of its boomer clientele.

“We’re also starting to see a subset of fast food called ‘fast casual,’” says Tingling. “It’s food prepared right in front of you, made with fresh ingredients, at a premium to what you’d get at a traditional fast-food outlet.” One example is Toronto-based Lettuce Eatery, where health-conscious customers can pay up to $9 for custom-made salads prepared from more than 70 different fresh ingredients.

A recipe for change is underway. And the fast-food companies that fail to cook up new solutions to existing market conditions could see a major bite out of profits. But there’s good news for them still: “People,” says Tingling, “simply don’t have the time for a full-service meal all the time.”