Bruce Horovitz reports in USA Today that the recession is jolting the restaurant industry to concoct who’d-a-thunk-it products that are redefining what even the industry’s biggest brands stand for.

Never mind that KFC’s (YUM) middle name is “fried,” as in Kentucky Fried Chicken. Its biggest campaign of 2009 is to sell what it calls unfried (i.e. grilled) chicken.

Pizza Hut, whose first name is pizza, is pushing pasta like there’s no tomorrow. Home delivered, no less.

McDonald’s, (MCD) the world’s biggest fast-food chain, is in the midst of rolling out a line of designer coffees — even as Starbucks (SBUX) is peddling value meals.

It gets crazier. Domino’s (DPZ) is delivering subs and pasta-stuffed bread bowls. Boston Market, the rotisserie chicken king, is pitching crispy chicken. Arby’s (WEN), the anti-burger chain, is hyping Roast Burgers. Cheesecake Factory (CAKE), known for its gigantic servings, is offering “small” meals. Even Morton’s, (MRT) the pricey prime steakhouse, has $5 burgers at the bar.
“This is a defining moment for the industry,” says Hudson Riehle, research chief at the National Restaurant Association. “The financial crisis has brought with it a redefining of boundaries.”

The fallout looks — or tastes — surreal. Many of the food innovations appear to be the opposite of some chains’ founding principles, and carefully honed brand image. Could sushi at Taco Bell(YUM) be next?

The driver is how the recession is eating into the heart of the $566 billion restaurant industry, which has seen 10 consecutive months of same-store sales declines and 19 consecutive months of falling store traffic.

“The industry has never faced a period of stress like this,” says Alan Hickok, a veteran restaurant industry consultant. “There’s never been anything this deep.”

As a result, the big chains are spinning out new products about as fast as any time in the industry’s history. “There are innovations, and there are spinovations,” says Russell Weiner, marketing chief at Domino’s. “When you’re trying to grow a category, you need to bring in innovations.”

Innovations beyond a chain’s usual fare can build sales by helping to quash the “veto vote,” the person in a group who can stop or divert a fast-food run because they don’t want a burger or chicken or pizza. If all three items and more are on the same menu, it can thwart the trip-killer.

This is even more important in tough times, when consumers who eat out take on a “one-size-fits-all” mentality — wanting to go to just one place to satisfy the entire family’s needs, says Christopher Muller, director of the Center for Multi-Unit Restaurant Management at University of Central Florida.

Recession-hammered chains have been trying just about everything to lure folks in the door. Gobs of publicity have been given to some for slashing prices to $5 (as Friday’s did to sandwiches and salads in May) or even giving away food (as Denny’s (DENN) and KFC have done).

But this is a more fundamental change taking place deep inside the restaurant industry’s R&D departments. This product mill isn’t necessarily about buffing restaurants’ brand images. They are just desperately trying to give folks what they want.

“Everyone is looking in everyone else’s backyard to see if they can find any green grass,” says Dennis Lombardi, an industry consultant at WD Partners. While there are some signs that the restaurant world’s troubles are bottoming, Lombardi says, “This is the worst I’ve seen in the 35 years I’ve been in the industry.”

Menus change with the times

But the new menu items also are about more than bad times. They are also about changing times. Consumer tastes, particularly for better-for-you foods, have evolved in recent years.

No one’s more aware of that than KFC. So, last month, the fried chicken chain began undoing the image it’s spent years building. It rolled out grilled chicken.

New ads urge consumers to “unthink what you thought about KFC. Taste the unfried side of KFC.”

KFC has held nothing back in convincing consumers that fried is yesterday’s news. “It’s one of the biggest new product rollouts in the history of our company,” President Roger Eaton says.

Perhaps it went too big. In a bid to get consumers to try the new chicken, it got Oprah to announce a deal on her TV show for freebie consumer meals. But KFC wasn’t prepared for the enormous response. Stores ran out of supply — angering millions of customers.

The chain attempted to make good on its giveaway gone awry with downloadable coupons from its website. But in the end, many customers left empty-handed — and angry. “We didn’t project the level of interest that occurred,” Eaton says.

But Eaton insists it was worth all the bad press that KFC got over the fowl-up. “There’s no one in America right now who doesn’t know we’re selling grilled chicken,” he says.

What’s changing at the chains

Other restaurant chains trying to break out of their usual boxes:

•McDonald’s is selling designer coffee. It’s some stretch from cheap burgers. But the fast-food giant is adjusting to evolving consumer tastes with the rollout this month of McCafe specialty coffee bars in many McDonald’s, says Wade Thoma, vice president of U.S. menu management.

Now that espresso-based coffees have achieved “critical mass” with consumers, he says, “It’s something we should be offering at McDonald’s.” That’s just the beginning of the chain’s beverage plans. It’s also testing frappes and smoothies. “We’re focused on beverages,” he says.

Meanwhile, the burger giant has become a chicken giant. Since adding chicken to its menu four years ago, Thoma notes, “We sell almost as much chicken as beef.”

•Pizza Hut is selling pasta. One year after adding pasta to its delivery menu, pasta has become a $500 million business at Pizza Hut, says Brian Niccol, marketing chief. It’s on the way to becoming a $1 billion business, he says.

Pasta has been one of Pizza Hut’s most successful new products, right up there with Stuffed Crust pizza, he says. It now accounts for slightly under 20% of it sales. While it has siphoned off some pizza sales, it has added to sales early in the week and on Sunday nights, he says.

Instead of insisting that “we’re only in the pizza business,” Niccol says, Pizza Hut is now asking consumers what they want the chain to sell, and when.

•Domino’s is selling subs. The world’s largest home-delivery pizza chain last summer started rolling out a line of sub sandwiches. Thanks to that new sub line, marketing chief Weiner says, Domino’s posted a slight same-store sales boost in the first quarter.

“The trick is to grow in a place that consumers accept,” Weiner says.

Last month, Domino’s rolled out five pasta-stuffed bread bowls. Consumers accept that, he says, because the bread bowls are made from the same dough as the pizza.

Read more at USA Today