Thursday, February 25, 2010

BK's new breakfast items--and ongoing pricing mess

Any commandos looking for near-term work in the Miami area? Some of us are considering a raid on Burger King’s headquarters to rescue the chain’s menu-development team. Management must be working them 24/7 to get the sort of product output we’ve been seeing, and the volume is about to increase with the rollout of several new breakfast items.

Those additions will include a new muffin sandwich and a breakfast bowl, according to executives of Carrols Corp., the chain’s largest franchisee and a likely sympathizer with our mission. In talking with investors today, the officials indicated they’re not exactly overjoyed with the products pouring out of the franchisor’s test kitchens.

Indeed, analysts were advised during the conference call that Carrols can’t provide them with a general outlook for its Burger King restaurants because of “uncertainty regarding the impact of new product introductions,” in the words of CFO Paul Flanders.

He and his colleagues explained that next in the staging area for BK are a number of higher-priced items, including ribs and additions to the XT premium burger line. Although Carrols is “cautiously optimistic” about the sales prospects for those additions, the ka-ching may not be as loud as BK hopes because of tight consumer spending and widespread discounting by competitors, said president Dan Accordino.

Carrols noted that its BK units were selling only 24 Steak House XT burgers a day, though supporting advertising had yet to begin. Still, “I’m not certain that the units are going to be terribly significant,” said Flanders.

That’s not to say aggressive discounting has worked well for BK, either, Accordino remarked. He cited the chain’s controversial $1 double cheeseburger, a product other franchisees have slammed as a giveaway that costs them money.

The bargain-priced item isn’t delivering sustained sales, contrary to the chain’s hopes, Accordino explained. Orders have tapered off since the deal was introduced last fall, with comp sales at Carrols’ BK units falling about 8% year-over-year during the first six weeks of 2010, the stock analysts learned.

Even with that decline, the $1 double accounts for 10% of sales at Carrol’s BK units. However, “while we're selling a lot of sandwiches, our incidence of drink and fry add-ons is not that high, making the gross profit contribution less appealing than we had hoped,” Accordino said.

That’s on top of the margin damage fellow franchisees had feared, he indicated.

The assessment is damning for BK because Carrols was one of the franchisees that remained loyal to the home office after fellow licensees sued to kill the double deal. The franchisor eventually agreed to reformulate the sandwich, taking out a slice of cheese and holding the $1 price. The true double cheeseburger (two patties, two slices of cheese) is being repriced at $1.19.

That overhaul will bring the $1 sandwich’s food cost below 50%, said Carrols CEO Alan Vituli. More importantly, he suggested, the $1.19 double cheeseburger might wean customers off what BK has termed “extreme affordability.”

“What we’re experiencing is that extreme affordability is converting too many of our core customers to extreme bargain seekers with no interest in looking beyond the extreme market,” Vituli said.

Wednesday, February 24, 2010

Terrorism barges into restaurants

Restaurants are expected to provide a respite from the world’s weighty troubles. But lately they’ve been tied to the scourge that tops the list, terrorism.

Authorities in Wisconsin are trying to find the person who called an Appleton Taco Bell Saturday and said he’d left a bomb there. No explosives were found.

The individual is believed to be the same one who asserted the next morning that he’d stashed a bomb at a regional airport in the area, prompting a full-scale evacuation and search. Some news stories say a restaurant employee overheard people talking about the possible threat during breakfast. Others say the restaurant where that person worked had been called by the suspect. In any case, the name of the restaurant was not divulged in press reports. No bombs were found.

Meanwhile, officials are trying to close the book on a Kansas City incident in which nearly 50 customers of a nearby Mexican restaurant were poisoned last summer. A 19-year-old former staffer of Mi Ranchita reportedly pleaded guilty yesterday to slipping pesticides in the restaurant’s salsa at the request of her boyfriend. He apparently felt he’d been dissed by management during his time of employment at a sister restaurant. Killing or sickening patrons would be an apt revenge, he figured. The boyfriend is awaiting trial.

Disgruntled employees were also arrested after customers found pills in the sandwiches they purchased through the drive-thru of a Burger King in Jacksonville, Fla. The pills contained hydrocodone, a painkiller. Press reports say one patron discovered the pills, which had been slipped into his fish sandwich, while he was adding salt and pepper. Another patron reportedly ingested the pills and suffered seizures.

The coverage says the two employees who were subsequently arrested had conflicted with management over their performance and behavior.

In a business as large and widespread as the restaurant industry, you’re always going to have those troubled individuals the fringes who somehow come to equate kicking other people with righting what’s been done to them. Add the factor of an economy that’s pushing more people to the edge, and a step-up in that twisted behavior shouldn’t be a surprise.

But I can’t help but remember one of the most disturbing industry developments I had to cover, the shooting of 43 people at a Luby’s in Killeen, Texas. Twenty-three would die. A dishwasher was found days later, cowering in the warewashing machine.
The shooter’s motives were never known; he crashed his truck through the restaurant’s windows, shot as many people as he could, then killed himself, taking any rationale with him.

Afterwards, in trying to supply the why to my story and a column I wrote, I spoke with Frank Mankiewicz, the press secretary for Robert F. Kennedy at the time of his death and a longtime figure in Democratic politics and messaging. Mankiewicz theorized that restaurants had replaced town squares as the focal points of communities, particularly small ones.

As such, he suggested, they’ve become the obvious stage for the disgruntled and resentful sorts who want to exact revenge while getting the public’s attention. It's the place to make a big bang and feel important, or at least powerful.

Sadly, nearly 21 years later, Mankiewicz’s words still seem on target.

Friday, February 19, 2010

New coffee to pop up at Jack in the Box

Burger King grabbed the headlines this week with its agreement to start serving Seattle’s Best Coffee, Starbucks’ secondary brand. But Jack in the Box hinted yesterday that more coffee news is percolating.

While the regional burger chain is experimenting with new flavors of shakes and smoothies, “We’re also looking at our coffee program,” CEO Linda Lang told stock analysts. “More news on that later.” She was responding to a query about how the burger brand might respond to initiatives like the one that had been disclosed by BK.

“Would you consider a branded product or do you need a branded product?” the questioner pressed.

“I don’t think you necessarily need a branded product,” responded Lang. But she wasn’t providing details. “we’ve looked at the different options and will be talking about that soon.”

During the conference call, Lang also acknowledged that Jack’s Southwest Chicken Bowl, introduced late in 2009, bowl wasn’t exactly a hit.

“That was not one [of] our stronger products,” she noted, according to a transcript of the call provided by

Lang explained that the item, an extension of an older line of rice-based meals in a bowl, was priced at $4.29, and many franchisees charged “significantly” more than that. She suggested going above $4 in the current environment is not prudent, adding that Jack’s just-introduced grilled sandwiches have been much better received. The sandwiches are priced at $3.99.

That prompted more head scratching by Robert Derrington, the restaurant analyst who’d asked about coffee. “Given that your company generally is pretty sophisticated about testing products before you roll them out, did you know in advance that the Southwest Bowl wouldn’t do as well, and if so why did you proceed with it?” asked Derrington, who tracks restaurant stocks for Morgan, Keegan.

Lang countered that the bowl was a niche product, and noted that new products are always tested in “limited markets,” not in a full-blown dress rehearsal.

Other revelations concerned the relatively stronger performance of Qdoba, Jack in the Box’s secondary franchise chain. The smaller but more expensive brand posted a comp-store sales decline of 1.7% for the quarter ended Jan. 17, compared with an 11.1% freefall at company-operated Jack outlets.

“:We’ve seen reports of a boost in confidence among the more affluent segment of the population while consumer confidence among those with lower income levels have remained depressed,” said Lang. “We think this helps explain the divergence in sales trends at Qdoba verses Jack in the Box.” Qdoba has the better-heeled clientele, she suggested.

Monday, February 15, 2010

What's in Panera's oven, Grasshopper?

After Ron Schaich resigns this May as CEO of Panera Bread, maybe he’ll grow a long white beard and sit atop a mountain somewhere, dispensing wisdom to chain execs who make the climb. Consider the profundities he uttered after Panera posted the sort of fourth-quarter results that would’ve prompted whispers of steroid use if this were baseball.

On the sales impact of operations: “Though operations are never given credit for driving sales, I am convinced we would not be having the success we are without improved operations,” said the Wise One. (That success, by the way: comp sales increases of 8.4% for company stores and 9% for franchised units for the first six weeks of 2010, even with bad weather depressing intake by an estimated 4%.)

On the zen of catering: “In my view our weakness in catering [during the first half of 2009] was a good thing. It forced our team to determine what really mattered in building catering sales.” Shaich noted to investors that 2010 catering sales are running 17% year to date above the comparable period’s for 2009.

On the addition of dinner-type items, like the new Mac and Cheese and a salmon-topped salad: “People often make this mistake. They think of the evening business as dinner. We don’t. We think of the evening business as lunch in the evening. Panera is never going to be in the business of serving what would be considered classically casual dining fare for date night.”

Shaich also offered a few glimpses into Panera’s future, including the introduction of a new customer loyalty program in company-operated units in April, and the possibility of licensing its name to retail products. He noted that a Panera-brand soup is already being sold on an experimental basis by Costco, one of 30 to 50 tests currently underway for the chain.

Thanks to for making available a transcript of Panera’s fourth-quarter conference call. It spared me from having to scale a mountain.


Thursday, February 11, 2010

How do you sale 'bail' in Japanese?

Did I miss some sort of zombie uprising in Japan? Or maybe the leak of a flesh-eating microbe from a germ-warfare lab? I’m just trying to understand why the world’s second-largest economy has been retagged in such short order as a place where U.S. restaurant companies would rather not be.

Not long ago they were gazing upon the market with the sort of slack-jawed lust they currently hold for China or India. Now they can’t get out of there fast enough.

McDonald’s indicated this week that it’ll close about 430 stores in Japan within the next 18 months. That’s despite what CEO Jim Skinner had earlier described as “sold progress” in the face of “significant economic headwinds” during 2009. Comparable sales for the units there had been positive, a sign of considerable strength in the world’s current economic plight.

McDonald’s is hardly alone in being spooked about Japan. Wendy’s announced its pullout in December, after operating there for 29 years. Even stranger, the chain’s new owner has cited international development as a key strategy for bolstering the brand’s fortunes. The only nation with a bigger economy than Japan’s is the United States.

But the retreat isn’t limited to quick-service companies. The parent of Outback Steakhouse recently alerted lenders that it’s considering the divestiture of its restaurants in Japan, along with outlets in South Korea and Hong Kong. It cited “attractive market conditions,” which must be inconspicuous to Wendy’s/Arby’s Restaurant Group and the company that owns McDonald’s Japanese operations (the concern is a joint with U.S.-based McDonald’s Corp.)

Outback’s parent, OSI Restaurant Partners, said it’d also consider the sale of development rights to Asia if lenders were willing. That’s hardly a vote of confidence in the opportunities of a onetime Asian tiger like Japan.

What makes OSI’s interest all the more puzzling is its partial ownership by Bain Capital, the mega-sized private equity firm.

As a major stakeholder, Bain presumably had to give its okay before OSI could consider a sale of the Asian steakhouses. Not long after OSI aired the possibility of a divestiture, Bain indicated that it was buying a controlling interest in another foodservice company: The Japanese franchisee of Domino’s Pizza.

Monday, February 8, 2010

For sale: Restaurant barbells, right price

In the beginning, there was pricing. A restaurant set the charges for menu items on the basis of cost and what patrons were willing to spend.

Then hard times hit, and the chain portion of the industry resorted to what it cleverly called barbell pricing. For the everyday bargain hunter, the big brands offered head-turning deals like a dollar menu. At the other end of the barbell, they sported premium items with a price to match, hoping to snag a higher-margin purchase from sports who felt like splurging.

Now you can scratch “barbell” from the glossary. A single label has yet to emerge, but several bellwether chains are already switching to new and more complex pricing strategies. The approaches differ, but they share the common feature of more precise segmentation.

McDonald’s calls its variety “four-tier pricing.” It’s shifting to a model with four categories of products arrayed by price: Everyday value, or what was once the bargain end of the barbell; core items, with a mid-scale price to match; premium items; and the new fourth tier, or smaller servings of premium selections offered accordingly at a lower price.

The prime example in the United States is the new Mac Snack Wrap, essentially the guts of a Big Mac wrapped in a tortilla. Overseas, McDonald’s offers such four-tier items as the Petite Du Jour in France and the Little Taster sliders in the United Kingdom.

The products are intended to prompt a trade-up by customers who normally purchase off the lower-priced bargain menu. The Mac Snack Wrap, for instance, costs $1.39 in the states, compared with the Dollar Menu.

The items are also seen as a way of building add-on sales. Customers might buy a core item, then try a Mac wrap—in essence, a premium item at a high-value price.

Burger King is taking a different approach with what it’s calling four-corner pricing. Speaking recently to Wall Street, BK executives cited the strategy as a key component of its efforts to build profit margins, but declined to provide details. Their sketchy description suggested that analytics are being used at the store level to help units find the ideal price that their market will bear.

Chain officials said the new strategy was the “primary difference” between the financial performances of company-operated and franchised stores during the last quarter of 2009. The model has now been rolled out to all the licensees, the execs noted.

Starbucks is similarly adjusting prices on a market-by-market basis. The new “architecture,” in the words of execs, is now in place at 90% of the chain’s U.S. outlets.

In a recent conference call with analysts, they described the new approach as a pricing rationalization. Prices were raised or lowered to satisfy the price sensitivities of markets, based in part on demographics and customer reaction. In some instance, that meant dropping charges on selected items. In others, it involved “adjusting some of the more complex costly products,” said CFO Tory Alstead.

Translation: Rising prices on some items to preserve margins, provided consumers don’t balk.

Perhaps not coincidentally, two points of Starbucks recent 3% rise in comp sales were attributed to pricing gains.

The success enjoyed by McDonald’s, Burger King and Starbucks with their new pricing approaches is likely to prompt more pinpoint pricing, at least in fast-food.

Which means the market is about to be flooded with barbells—and possibly some dumbbells, too, if the followers don’t do it right.

Friday, February 5, 2010

Some blunt words about Pizza Hut & KFC

It’s not unusual for chain executives to pass long customers’ opinions of their brands. It’s another matter for the officials to relate the slams along with the gushing praise, especially while talking to investors. Yet, in a refreshing burst of candor, that’s exactly what the CEO of Yum! Brands did Thursday during a conference call about the company’s fast-food chains, Taco Bell, KFC and Pizza Hut.

Chief executive David Novak had the harshest words for Pizza Hut’s domestic operations, whose same-store sales fell a head-turning 12% during the last three months of 2009. Oh, sure, the American public loves the chain’s pizza, said Novak, but “the consumer has told us frankly that we are simply too expensive.” He noted that the venerable chain is also focusing on service speed and kitchen operations, so you have to suspect that customers aren’t tossing bouquets in those directions, either.

Novak said the chain is countering its high-price stigma with the “successfully tested” Any Way You Want It promotion, where patrons can get a customized pie for $10.

And how about KFC’s domestic operations? Oy, don’t ask.

“There is no question we have our work cut out for us,” Novak told analysts on the conference call. He ticked off the chain’s three main perception problems in the U.S.: Too much fried food, not enough value, and lousy operations.

The first two objections from customers have been addressed, he said. Indeed, KFC’s new Kentucky Grilled Chicken now accounts for a fourth of all the chicken on the bone sold by the chain.

But operations still have a ways to go, particularly in terms of service speed and not running out of some menu items before the next batch of supplies arrive, Novak acknowledged.

He had nothing but praise for Taco Bell, describing it as one of the company’s sales and profit workhorses, with ample room left to grow in the U.S. market.

The domestic arms of Pizza Hut and KFC, on the other hand, weren’t even addressed when Yum! gathered analysts in New York a few months ago for a close-up look at the company’s inner workings. “we made the conscious decision to not even cover Pizza Hut and KFC U.S. at the December analyst meeting,” he noted.

Then again, those pieces of the business still seem to be held in higher regard than Yum’s two other American fast-food brands, Long John Silver’s and A&W. “[I’m] wondering whether there is a potential to sell those brands or whether we'll see those brands continue to operate here as it relates to generating incremental cash,” Jeffrey Bernstein, the restaurant analyst for Barclays Capital, asked the Yum officials on the call.

“Our goal with Long John Silver and A&W is to make those brands stronger and to build them working with our franchisees,” countered Novak.

Wednesday, February 3, 2010

Educating Peter

Here’s what I learned so far today about the business of restaurants:

Slash time?
While the rest of fast food was slashing prices like a crazed TV pitchman, Carl’s Jr. continued to tout the heft and quality of its specialties. It’s an admirable high-road strategy, but today’s financial update from the chain’s parent suggests it’s time to hone the blade and get a-cuttin’.

The regional burger chain posted comp-store declines of 8.7% for the quarter and 9 percent for the month ended Jan. 25. In contrast, Hardee’s, a more value-oriented sister brand, reported slips of 2.5 and 2.8%, respectively. Both are part of CKE Restaurants, which also owns the Red Burrito and Green Burrito concepts.

Recently, Carl’s has put more of a spotlight on the heft of its products, an apparent effort to suggest value without sacrificing check size. It remains to be seen if that approach will help in halting a slide in traffic.

But don’t expect the brand to switch directions and slash prices the way competitors have. “We will continue to focus on the excellent value-for-the money of our premium products,” CKE CEO Andy Puzder said in announcing the financial results.

Levy clan must have ketchup for blood
The Levy family, one of Chicago’s more renowned restaurant dynasties, is Pollo Campero’s franchisee for Illinois and Florida. The clan is also still hatching new concepts. For instance, its Levy Campero operation has partnered with the chicken chain’s franchisor to create a new health-oriented concept for Downtown Disney, the nighttime entertainment complex near Walt Disney World in Orlando.

The place will feature Campero’s Latin-style chicken, salads and wraps made with fresh ingredients.

Restaurateurs to get some on Valentine's Day
Lovers may be skimping on presents this Valentine’s Day, but the quest for amour won’t curb their dining out.

So report the incurable romantics at Crain’s New York Business. The typical gift giver will spend $63.34 cents on flowers, candy or whatever this Feb. 14, as compared with an average of $67.22 last year, according to National Retail Federation data cited by Crain’s in this week’s edition.

Yet restaurants will do better this year than they did on lover’s day of last year, according to other sources in the article. Because Feb. 14 falls on a Sunday this year, right in the middle of a three-day weekend, people will be dining out with less reserve, asserted IBIS World, a research firm.

Monday, February 1, 2010

Taco Bell's fake and pass

Taco Bell, for some elusive reason, isn’t using the term “Super Bowl” to detail its ad plans for Football’s Biggest Game, as the chain coyly labels the media mega-event. An announcement issued today says a new flight of ads “will air before, during and following” the Game, exposing the brand’s new Five Buck Boxes to 100 million viewers. But not once do you read the “S” or “B” words in the release.

Maybe the dodge-speak is necessary because the new bargain meals are tied to the National Basketball Association, not pro football. Indeed, the Five Buck Boxes are all but dribbling and shooting foul shots. Their official name is the NBA Five Buck Boxes. The packaging is NBA-themed, the featured foods are called Taco Bell All-Star items, and they’re touted in the commercials by Basketball Hall of Famer Charles Barkley, the NBA color commentator for TNN (the Super Bowl is being aired by CBS).

What else would you expect from the Official Quick Service Restaurant of the NBA?

The announcement didn’t mention any airings of the ads during the Worldwide Multi-National Competitions a few days later in Vancouver. Some might know them as the Olympics.