William Spain writes at San Francisco Chronicle that While the fast-food giants have been holding up better than many other industries – and certainly better than any in the restaurant sector – even they are beginning to suffer from the downturn.
And if the economy, especially with some new jobs, doesn’t start coming back soon, that pressure is apt to continue this year and possibly beyond.
Consider McDonald’s: In late 2009, it posted some of its first U.S. same-store sales declines in years for October and November. The Golden Arches until then had been firing on all cylinders for years, using new products, value menus and expanded hours to lure in diners looking to “trade down” from pricier fare.
The trouble appeared even earlier for some rivals. Yum Brands, parent of Taco Bell, Pizza Hut and KFC, posted a 6 percent decline in same-store sales in the third quarter while Burger King Holdings reported a nearly 3 percent drop in the same key industry metric. Wendy’s/Arby’s Group numbers also slowed.
Fast-food chains “have been holding up relatively well, as long as you say ‘relatively,’ ” said Dennis Lombardi, executive vice president at WD Partners, a consultancy. “They didn’t really feel the pinch until the middle of the year, while other restaurants did in 2008.”
He noted that the category has “some of the lowest price points and a high value perception (but is) not absolutely resilient, nor immune” to economic conditions.
“There is an industry adage that says when money gets tight, you trade down, and when you lose your job, you trade out,” he said.
One thing that has been hurting the top and bottom lines is an orgy of deep discounting and couponing. There is almost a “how low can you go” kind of contest going on when it comes to items such as double cheeseburgers and snack wraps.
That has moved traffic levels higher in some cases, Lombardi said, “but the same can’t be said for profit margins. Some people say this is a ‘penny-profit’ business, but (now) it is a tenth-of-a-penny-profit business. But it is certainly better than not having the cash register ring.”
On the plus side, profits have been holding up better than sales, largely because of the help of a weak dollar, which helps international operations, and the impact of lower commodity prices as worldwide demand for everything from potatoes to cheese slows. Labor costs are also down with the current buyers’ market for jobs, while all of the big chains have been busily streamlining operations and squeezing their vendors.
The stocks have been mixed, though all are off their lows. Dow component McDonald’s is trading at $62 and change, off a bit from north of $64 late last year but well ahead of its March nadir of just over $50. Burger King is in the $18 range, down from $24.10 in April but above a low of $15.61 last summer. Wendy’s/Arby’s is going for $4.70, smack-dab in the middle of its 52-week range, while Yum is hovering near $36, compared with $23.37 last spring.
According to Zacks Research, the “industry remains under pressure in the current economic downturn, which has badly affected consumers’ disposable income.”
Operators are reporting declining traffic as consumers dine out less or eat at home, while competition “is expected to remain fierce with respect to price, service, location and concept in order to drive traffic, which may adversely affect … restaurant operating margins and profits.”
Still, with the exception of Wendy’s/Arby’s, Wall Street is expecting higher 2009 profits for the big four, with earnings for all then continuing to grow through 2011, according to analyst estimates compiled by FactSet Research. That could change when the companies begin rolling out fourth-quarter and full-year numbers over the next few weeks and start to give outlooks for 2010 and/or beyond.
Much will, of course, depend on how long the economy remains in the doldrums and a shifting competitive picture.
Read more: San Fransico Chronicle