To Keep Guests, Fast Food Loses the Fiberglass Decor

Brandweek reports that with slate floors and subdued lighting, Arne Jacobsen-inspired egg-chairs and printed wall panels by French architect Philippe Avanzi, a certain lunch spot in Manhattan’s uber-hip Chelsea district fits right in with the nearby boutiques and art galleries. Less predictable is the place’s name: McDonald’s.

Late last year, the franchisee Paul Hendel became the first operator in the Golden Arches’ 14,000-unit system to adopt the “urban redesign” aesthetic—one that the burger chain had earlier used to update its locations throughout the E.U. At roughly the same time, archrival Burger King an-nounced plans to make over its 12,000 American units with an industrial look featuring corrugated metal and brick walls—all in the name of décor. Menus, prices and clientele will largely remain the same. The upshot? Expect fast-food interiors to change.

What’s going on here? Well, in large part, it’s because of Starbucks—or at least the effect that Starbucks and other so-called “fast-casual” restaurant chains have had on the QSR segment. Roughly translated, it boils down to, get hip or risk losing market share.

For decades, QSRs adopted some variation of the standard layout of fiberglass seats and mustard-colored wallpaper. The materials were cheap to buy, easy to keep clean—and who cared what the restaurants looked like? Most fast-food customers didn’t stay much longer than 15 minutes, anyway. But fast food’s strategy is changing. Not only do quick-serve chains have to hold their own against encroachment of fast-casual competitors like Chipotle and Panera (which offer nicer settings and higher-end fare for only a modest bump in the average ticket), but consumer eating habits are also getting more sophisticated. In a category whose main culinary attribute has always been “fast,” companies are increasingly catering to consumers who want to linger. Wi-Fi is a given and among other new features are laptop plugs, upholstered chairs and flatscreen TVs.

Read More at: Brandweek

Carl’s Jr. Owner CKE Bought by Thomas H. Lee Partners

BusinessWeek reports that Thomas H. Lee Partners LP agreed to acquire CKE Restaurants Inc., owner of the Carl’s Jr. and Hardee’s fast-food chains, for about $619 million in cash. The shares jumped the most in almost nine years in New York trading.

CKE investors will receive $11.05 in cash for each share of CKE common stock they hold, the companies said today in a statement. That’s 24 percent more than yesterday’s closing price of $8.91. Thomas H. Lee also agreed to assume about $309 million in debt for Carpinteria, California-based CKE.

“It’s a fantastic company that produces a lot of free cash flow,” said Mark Smith, a restaurant analyst with Feltl & Co. in Minneapolis. He recommends holding the stock, which had climbed 28 percent in the past year before today. “They weren’t out looking and begging for a buyer,” he said.

CKE had free cash flow — cash flow from operating activities minus capital spending — of $11.5 million in the third quarter, more than double the average of 50 restaurant companies, according to Bloomberg data.

Sales at CKE restaurants open at least a year fell 6 percent in the quarter ended Jan. 25, as unemployment remained high and competitors lowered hamburger prices, the company said this month.

The stock jumped $2.25, or 25 percent, to $11.16 at 10:30 a.m. in New York Stock Exchange composite trading after reaching $11.24, for the largest intraday gain since April 2001.

Industry Pioneer

CKE has 3,147 restaurants in 42 states and 14 countries, including 1,221 Carl’s Jr. restaurants and 1,913 Hardee’s. Founder Carl Karcher borrowed $311 to buy a Los Angeles hot-dog cart in 1941 and became a pioneer in the industry, introducing salad bars, char-broiled chicken-breast sandwiches and self- service beverage stations. He died in 2008.

Thomas H. Lee, which also owns a stake in Dunkin’ Brands Inc., operator of the Dunkin’ Donuts and Baskin Robbins chains, has raised $22 billion of equity since its founding in 1974. The Boston-based firm, also known as THL Partners after founder Thomas H. Lee left the company he founded, has invested in more than 100 businesses with an aggregate purchase price of more than $125 billion.

CKE has through April 6 to solicit better offers from third parties, according to the statement. The deal values CKE at about 12.5 times earnings over the next year, below the 14 times average of other fast-food restaurants, Smith said. Barring other bids, the deal should close in the second quarter of this year, the companies said.

UBS Investment Bank and law firm Stradling, Yocca, Carlson & Rauth are advising CKE. Bank of America Merrill Lynch and law firm Ropes & Gray are advising THL.

Fast-food Breakfast Sales Decline as Fewer Head to Work

Ylan Q. Mui writes at the Washington Post that the nation’s high unemployment rate has thrown millions of people out of work, scared shoppers away from stores and threatened the economic recovery. Now it’s taking a bite out of breakfast.

Breakfast sales had grown at a ravenous pace during the boom years as busy workers scarfed down sausage biscuits on the way to the office, fueling a $57 billion business and accounting for as much as a quarter of sales at some fast-food chains. Chains opened earlier and expanded their morning menus to accommodate the traffic as lunch and dinner sales flatlined.

But as the jobless rate hit 26-year highs fewer people headed to work, and even those who did worried about their spending. So they poured bowls of cereal at home or simply slept in, putting breakfast on the back burner.

“Typically, if you’re unemployed, you’re not getting up at six and not going through the drive-thru,” said Jeffrey Bernstein, an analyst at Barclays Capital. “There is a direct correlation between unemployment and breakfast sales.”

In the five years before the recession hit, breakfast sales jumped 64 percent, according to NPD Group, a consumer behavior research firm, making it one of the fastest-growing sectors in the industry. But traffic slowed as the economy tanked and the ranks of the jobless soared. By the time unemployment hit 10 percent in the fall, breakfast traffic was down 4 percent.

This month, executives at Burger King reported that traffic rose during every meal except breakfast in the most recent quarter. They blamed unemployment for the falloff. McDonald’s chief executive Jim Skinner has said that breakfast sales at its 14,000 U.S. restaurants were rocky in areas with high unemployment despite overall growth. Wendy’s jumped into the breakfast bandwagon three years ago, only to end up scuttling its menu amid poor sales. It hopes to relaunch the menu next year.

“When people start feeling economic stress, they tend to trade down,” said Dennis Lombardi, executive vice president at WD Partners, a food consulting firm. “When they lose their job, they trade out.”

The decline is also part of the broader trend of Americans eating more meals at home because of tough economic times. Food consulting firm Technomic last month lowered its annual forecast for restaurant sales to a drop of 1.6 percent, driven in part by weaker fast-food sales.

But breakfast stands out because of its explosive growth before the recession. In addition, it is extremely profitable: Coffee is mostly water, and eggs are cheaper than beef. Bernstein estimated that breakfast sales at McDonald’s accounted for about a quarter of its revenue but 35 percent of its profit.

Kathy Hasty, senior director of hot foods at 7-Eleven, said breakfast at her chain traditionally held up well during recessions even as other meals suffered — but other downturns didn’t come with double-digit unemployment. By late last year, sales of breakfast sandwiches were down 8 percent and she could fathom only one reason why.

  Read more at: The Washington Post

Wallet Woes Have Slowed Fast-food Reform

Mary Shedden of the Tampa Tribune writes that Americans love healthier food choices, but if a veggie burger isn’t on the value menu and a double cheeseburger is, guess which one they’re going to choose?

That disconnect is the resounding message for restaurants across the country, say market analysts watching the public’s buying habits. Mentally, customers want healthier food, but pocketbooks win out in these tough economic times.

“The flashy $5 deals outshine everything else going on,” says Maria Caranfa, a food service analyst for Chicago-based Mintel.

Two years ago, freshness and quality were high priorities for both consumers and the restaurants that wanted their business. Menus at the top 31 fast-food chains were increasingly promoting items with a natural, lean, light, low-carb, and low- or no-fat focus.

But once the economy soured, a push for nutritional claims got sidelined, and dropped nearly 3 percent in just one year.

Caranfa says the current trend doesn’t mean healthier foods aren’t popular. A 2009 survey of American adults shows that their top priority for food was that it be fresh and safe. Four of the top five food qualities were health-centered, ranging from freshness (69 percent) to low-fat or low-calorie (28 percent).

Ironically, 32 percent of those polled wanted to see large portions on their plate.

Mintel’s annual review of fast-food restaurants says that so far, restaurants have made fairly minor improvements in their push for more business. Examples of some of the changes made include Taco Bell’s offer of “reduced-fat sour cream” on a triple steak burrito, and Chick-fil-A’s chargrilled chicken wrap with a “light dressing.”

Dino Lambridis, co-founder of the Evos restaurant chain, says diners who want real nutritional improvements won’t be fooled by shallow nutritional marketing.

“I think the consumer has gotten jaded about all these claims,” he says.

That’s part of the reason why Mintel predicts fast-food restaurants will get more serious in the future. Caranfa says chains likely will incorporate affordability with sustainability, which means they will use more natural and local foods, creating simpler meals and more eco-friendly business practices.

“In order for restaurants to become more profitable in the future,” Caranfa says, “they need to think about how they respond to the environment.”

An example: Drive-up and tater-tot mecca Sonic is now using cage-free eggs for its breakfast items.

What’s on the menu in Pennsylvania? Food facts

Phila. begins phasing in its strict new labeling law.

Don Sapatkin of the Philadelphia Inquirer writes at Philly.com that Swati Kapoor, 25, was about to order a double chocolate cake doughnut when she noticed something new on the rack at Dunkin’ Donuts.  A tag said 290 calories.  In an instant, she switched to a chocolate frosted doughnut (230 calories).

“To prevent obesity,” the skinny medical student explained, munching at a table in 30th Street Station.

Philadelphia begins phasing in enforcement of its strictest-in-the-nation menu-labeling law tomorrow. This first part, requiring chain restaurants to list calories on food tags and menu boards, is a relatively simple proposition that research shows can influence ordering habits.

A similar law will take effect in New Jersey next year, and dozens of such bills are pending around the country, including in Harrisburg.

What’s different in Philadelphia will become apparent on April 1, when restaurants with individual menus must list saturated fats, trans fats, carbohydrates, and sodium, in addition to calories, with every item.

No one really knows what will come of this broader experiment in attempted behavioral change.

“The majority of people, I believe, will see this as cumbersome and an overreaction and not necessary,” said George McKerrow Jr., president and chief executive officer of Ted’s Montana Grill, who anticipates having to expand the menu at his South Broad Street location from two pages to six.

Still, just two months after Ted’s added calories alone to its menu here, responding to a New York City requirement, McKerrow has noticed a small but measurable change in Philadelphia: “Some people have chosen to eat the healthier items more often.”

Restaurants initially fought all efforts to mandate labels on menus. As the movement spread, with dozens of variations proposed across the country, the industry switched its goal to uniformity: calories, yes; sodium, no.

It has won that fight everywhere except Philadelphia. City Council approved the measure in 2008, after viewing data that showed the impact of chronic diseases related to diet – diabetes is diagnosed in 13 percent of residents, high blood pressure in 36 percent – broken down by district.

Diabetics must manage their intake of carbohydrates (including sugar); too much sodium can raise blood pressure. Both are listed on the familiar nutrition-facts label on all prepackaged goods.

“But it is really hard for people, if they eat out, to know about the sodium content,” city Health Commissioner Donald Schwarz said.

At Olive Garden, for example, nothing on the dinner menu hints at a difference between linguine alla marinara (900 milligrams of sodium, according to its Web site) and pork Milanese (3,100 mg) – or notes that the Food and Drug Administration recommends less than 2,300 mg a day total, a line that must be added by April 1.

“It would make a difference,” said Nashikai Ianscoli, 57, of Center City, who has had to go on a diet to control her blood pressure. She grew up on a farm in the South where her mother got fresh vegetables by the bushel.

Much has changed since she was a child.

“Back in the 1970s, eating out was a special occasion. What people ate didn’t matter as much,” said Margo G. Wootan, nutrition-policy director at the Center for Science in the Public Interest.

Americans now get an estimated one-third of their calories from meals outside the home. And though FDA serving sizes haven’t changed, restaurant portions, especially fast food, have doubled or tripled. Skyrocketing obesity rates – one-third of Americans are obese, about the same as in Philadelphia – defied every big fix attempted.

In 2003, an influential study examined long-term trends and calculated that a difference of 100 calories a day, either ingested or spent, could tip the balance from national weight gain to weight loss. This, the researchers concluded in the journal Science, could be accomplished through small changes that the public would be more likely to embrace.

Wootan’s Washington center, meanwhile, had been pondering how to get people to eat better. At a conference, she recalled, dietitians were presented with hamburgers, onion rings, and other fare from sit-down restaurants and asked to estimate caloric content. Even with nutrition degrees, they were off by hundreds of calories, always on the low side.

Wootan developed a model menu-labeling law and started calling dozens of policymakers around the country: Maine (the first to introduce a bill), New York City (the first to pass it), Philadelphia (the fourth to implement it).

Read more at:  Philly.com

Fast-food Chains ‘holding up’ in Bad Economy

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.

Earlier trouble

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

Providence Still Doughnut Capital of U.S.

Chris Barrett of the Providence Business News reports that if you love doughnuts and live in Rhode Island, you’ve come to the right place.

A recent study by the market research firm NPD Group Inc. found that the Providence metropolitan area has more doughnut shops per capita than any other region in the Untied States.

NPD said the Providence-Fall River-New Bedford area has 25.3 doughnut shops per 100,000 people. The Boston area ranked second, with 20.4 shops per 100,000 people.

The news should come as no surprise for diehard doughnut lovers, who may remember when NPD delivered the same news five years ago. But the new survey, conducted last fall, confirmed that Rhode Island is a mecca for those bundles of dough – or perhaps the coffee that goes with them.

The top 10 list confirmed the doughnut’s central place in Northeastern cuisine.

After Providence and Boston came the Hartford-New Haven area (16.7 doughnut shops per 100,000 people); Portland, Maine (14); Springfield, Mass. (12.9); Buffalo, N.Y. (10.8); Presque, Maine (10.8); Bangor, Maine (10.5); Albany, N.Y. (9.9); and Rochester, N.Y. (9.8). NPD compiled the list at the request of Providence Business News.

News of the updated list comes as Honey Dew Donuts Inc. prepares to expand its operations in New England. In Rhode Island, the company competes for coffee dollars with other players such as Dunkin’ Donuts, Tim Hortons Inc., Starbucks Corp. and McDonald’s Corp.

Providence Business News

Consumer Scorecard Traffic Gainers and Losers

Nations Restaurant News published the following Consumer Scorecards by NPD.

Powered by CREST, NPD is the leading source for market information within the foodservice industry. We help you identify potential customers, leverage competitive market insights, track product performance, and improve planning with the richest data, collected for more years than anyone else in the industry.

Healthful QSR Breakfast Items Wake up Morning Sales

Steve  Coomes reports in Nation’s Restaurant News that while quick-service restaurants have made great strides in creating healthful items for dinner and lunch menus, breakfast has been another matter — until now. The slow march of healthful items into the breakfast lineup appears to be quickening, and sleepy morning customers seem to like what they are waking up to.

Dunkin Donuts reports that its DDSmart healthful breakfast items rolled out last year are selling very well, and Starbucks says its low-fat, low-calorie baked goods and protein plates, also introduced in 2008, are attracting hungry customers as well. Like several other operators, Jamba Juice earlier this year added hot oatmeal to its breakfast menu, and Emerald City smoothies has bulked up its breakfast menu with granola. Even Krystal, better known for its two-bite, onion-spiked hamburgers, has added a breakfast bacon scrambler that boasts only 370 calories.

Philip Smith, corporate executive chef at Bruegger’s in Burlington, Vt., says both customer habits and traditional thinking by QSR operators have previously slowed the addition of healthful items to morning menus.

“A lot of [thinking] is focused around the egg, meat and cheese triumvirate as a hot breakfast staple,” he said. “It’s easy to make a salad-based lunch or dinner entrée, but it’s harder at breakfast,” where vegetables are less frequently featured.

Menu developers, he added, also have leaned too long on less healthful ingredients such as fat, salt, sugar and other carbohydrates to boost flavor. But he believes many are back in the kitchen examining new options.

In September, 290-unit Bruegger’s introduced a Veggie Melt Egg Sandwich limited-time offer centered on what Smith called an “egg white palette” packing 320 calories and seasoned with grilled red and green peppers, red onions, Swiss cheese and a spicy tomato sauce. Healthful items, he insisted, must be highly flavored if customers are to be lured away from other choices.

“We’ve used the spicy tomato sauce, a sun-dried tomato paste and a chipotle pesto on our sandwiches, and they brought a lot of flavor,” he said. “When you get that kind of flavor, all of a sudden you don’t just have an egg white, it’s much more interesting. Start adding vegetables and you’re building on it.”

Stan Frakenthaler, executive chef at Dunkin’ Brands in Canton, Mass., agreed, saying flavor, not health claims, is what sells.

“With our DDSmart line, the customer does not feel like they’re trading down in their experience because it doesn’t taste good,” he said. As a customer, “it’s simple for me: I’m not getting bland egg whites or feeling like I have to get something bland. I want real flavor.”

The chain’s DDSmart line at breakfast includes five items: two on flatbreads, two on English muffins and one wrap. Fillings include eggs, cheese, ham and turkey sausage, and range in calories from 170 to 350.

Frankenthaler said some of his Dunkin’ peers expected younger, health-conscious consumers would drive DDSmart sales, but that hasn’t been the case.

“It wasn’t just women living in cities,” he said. “It was college students, men, women, old, young, people in cities, rural areas and small towns.”

Read more: Nation’s Restaurant News

Baskin-Robbins Touts New Ice Cream Cone

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