October 18, 2008 in Nation/World

Value meals may keep eateries alive

With sliding economy, fast-food restaurants offering deals
By Mike Hughlett Chicago Tribune
 
Associated Press photo

A customer walks into a KFC restaurant in San Francisco on Oct. 7. New chicken wraps priced under $1.50 are proliferating at places like Burger King and KFC.
(Full-size photo)

CHICAGO – It seems like a bad time to invest in just about anything – except maybe tacos.

With the economy in a slide, the nation’s fast-food restaurants are rolling out big discounts and heavily promoting value, making this a golden time for diners on the run.

A foot-long sandwich at Subway goes for $5, about a buck less than last winter. New chicken wraps priced under $1.50 are proliferating at places like Burger King and KFC. Taco Bell began hawking an 89-cent taco and even a 79-cent cheese roll-up a few months back.

“I only go where they have deals,” said Dorin Budjei, who runs his own flooring company and is looking for bargains because business is slow. True to his motto, he was cashing in on a promotion at a Berwyn, Ill., McDonald’s: Two Egg McMuffin breakfast sandwiches for $3, when one alone costs just over $2.

Fast food is the part of the restaurant business that usually holds up best when the economy tanks. Right now special offers and value pitches are keeping fast food humming, according to market researcher NPD Group.

Overall customer traffic at fast-food restaurants was up 1.5 percent during the three months that ended in August, according to NPD. But visits from customers who weren’t responding to value pitches were actually down 0.9 percent during the same time. The difference is “deal traffic,” said Bonnie Riggs, an NPD restaurant analyst. “Any (restaurant) operator that’s going to survive in this time has to have a strong value proposition.”

While the savvy snacker can make out well, the fast-food chains are walking a tightrope. Soaring prices for beef, buns and other ingredients can squeeze profits on low-priced fare. In fact, McDonald’s Corp. is thinking of raising the price of its hallmark $1 double cheeseburger.

“It’s kind of like a game of chicken” for fast-food chains, said Morningstar restaurant analyst John Owens. The restaurant industry doesn’t want to repeat the notorious “burger wars” of 2002, when fast-food outlets got carried away with discounting premium items such as Whoppers and Big Macs and their profits took a hit, Owens said.

Without deals, restaurants would get less business from customers like David O’Neil. A divorced security guard at a downtown Chicago hotel, O’Neil said McDonald’s dollar menu particularly appeals to him when he’s with his two children, ages 7 and 10.

O’Neil is the type of value shopper that restaurant companies covet. The dollar menu for his kids lures him in, but he usually buys himself a premium sandwich that sports a higher profit margin.

Whether that pattern holds as the economy worsens is a concern, analysts say. Diners like O’Neil will have more incentive to forgo the premium Big Macs and go for the $1 double cheeseburgers.

McDonald’s franchisees have been bemoaning falling profit margins on dollar menu items for months, said Richard Adams, a San Diego-based consultant to McDonald’s owner-operators. “These 99-cent and dollar meals are priced at 2002 cost levels. It’s insane.”

McDonald’s said in July that changes are coming next year to the dollar menu. Although the company hasn’t given details, it has been test marketing the double cheeseburger at $1.09 in Savannah, Ga. A recent report from RBC Capital Markets said the burger eventually could be priced at $1.09 or up to $1.19.

Meanwhile, Burger King, to cut costs without raising prices, is testing a tad smaller meat patty on its $1 Whopper Jr., a value menu staple.

So what would a price hike of a dime or a quarter mean? William Ray, a department store worker, is a dollar menu regular, and after polishing off a double cheeseburger and a $1 McChicken, he had this to say: “I don’t think too many people would stop eating them for a dime, though for 20 cents more you might raise a few eyebrows.”


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