Fri, Jan 21, 2011, 2:21PM EST - U.S. Markets close in 1 hr 39 mins
On Thursday Wendy's/Arby's announced a corporate divorce. The company said it is "exploring strategic alternatives for Arby's Restaurant Group, Inc., including a sale of the brand." (Translation: Come and get it!)
On Tuesday Yum Brands, the conglomerate that owns Pizza Hut, KFC, and Taco Bell, announced it would accept takeout orders for two of its smaller units: A&W and Long John Silver's. Last fall Benihana, the Japanese-themed restaurant chain -- it's not quite fast food -- announced that it, too, was putting itself up for sale, while private equity firms acquired Burger King and CKE Restaurants, the parent of Carl's Jr.
Across the nation, venerable American fast-food chains seem to be struggling in a rapidly changing landscape. Roy Rogers has shrunk to a 48-location entity in nine states along the Atlantic seaboard. Arthur Treacher's, seemingly ubiquitous in my Midwestern youth, isn't quite sleeping with the fishes. But it's pretty hard to find one.What's going on? (My colleague Aaron Task and I chew over the question, literally, in the accompanying video.)
Fast-Food Nation
First, the food zeitgeist is changing in ways that make it less fun and profitable to own chains such as Arby's and Long John Silver's. While fast-food joints generally thrived during the recession, the news has been less rosy during the expansion. Consumer spending may be rising, but those at the lower and middle rungs of the income ladder are still struggling. And while the U.S. is still a tremendously large market for fast food, peddlers of fried protein and cheap burgers are losing market share. Agile, low-cost food trucks are proliferating. Chains such as Chipotle and Subway are expanding. There's a trend toward lower-priced, high-quality burger joints.
The greater sense of health consciousness isn't helping, either. The day Arby's was put up for sale, Wal-Mart and First Lady Michelle Obama, the acting nutritionist-in-chief, announced an initiative to remove salt and sugar from packaged foods. Take the salt and fat out of fast-food french fries and you may as well be eating roasted yucca.
Second, even in fast food, quality matters -- the quality of the product, the advertising, and the business strategy. Raise your hand if you've eaten at an Arby's lately. (I did recently, for the sake of journalistic investigation. And I'm still having flashbacks.)
There's no way of saying this politely, but here it is: Building a business around a pressed, processed protein product that bears little resemblance to roast beef and then trying to make it more appealing by covering it with a glop of molten goo that bears little resemblance to cheese doesn't seem like a particularly good idea. And when's the last time you saw a good ad for A&W? The chains being sold, for whatever reason, lost the ability to differentiate themselves in a crowded market.
As they have become less relevant to consumers, they have become less relevant to their corporate owners. At Wendy's/Arby's, Arby's is clearly the junior partner, with 3,700 stores compared with 6,500 for Wendy's. In the most recent quarter, Arby's sales fell 5.9 percent to $260.5 million, compared with a 1.7 percent decline to $600.7 million for Wendy's. (Wendy's/Arby's Group is slated to post fourth-quarter results on Jan. 26.)
Take a look at Yum's impressive restaurant counts: Of the company's 17,416 U.S. restaurants, only 969 are Long John Silver's and 328 are A&Ws.
Yum! Chinese Take-Out
But the decisions to jettison these brands are inspired less by how the companies are performing in their historic home and more by how they're doing outside the U.S., China, India, Europe, and South America; that's where the action is.
Take a closer look at Yum Brands: It's now essentially a Chinese take-out company based in Kentucky:
"¢ KFC was the first fast-food chain to enter China in 1987, Yum notes, "and is now opening KFCs at a rate of one per day in China." (I ate at one in Beijing -- not bad!)
"¢ In 2009, Yum! opened more than four new restaurants per day in international markets. Fewer than one half of Yum's 35,141 restaurants are in the U.S.
"¢ Pizza Hut has 7,500 restaurants in the U.S. and another 5,600 in 97 countries around the world.
"¢ In the third quarter the U.S. generated $970 million in revenues, while China accounted for $1.19 billion and other international markets brought in $704 million. (Yum's fourth-quarter results are due Feb. 2)
And while fast food and junk food are American exports that travel extremely well, not every brand becomes a global powerhouse. Coke and Pepsi became international standards, not RC Cola and Dr. Pepper. "We do not believe Long John Silver's and A&W All-American Food restaurants fit into our long-term growth strategy," says David C. Novak, Yum! Brands, Inc. chairman and CEO.
That's because they have little overseas presence. The same holds true for Arby's.
"A pure-play Wendy's will enable us to focus all of our energies on growing the Wendy's brand via new store growth both in North America and international markets," declares Roland Smith, president and CEO of Wendy's/Arby's Group.
As the company's 10-K shows, in early 2010 Wendy's had "136 company-owned and 235 franchised restaurants in Canada, and 293 franchised restaurants in 20 other countries and U.S. territories."
That's a start. But beyond 112 franchise operations in Canada, Arby's international operations consisted of: one in Qatar, one in the United Arab Emirates and eight roast beef joints in (ironically) Turkey.
As with almost everything else these days, "emerging markets" is the answer to the classic fast-food question: Where's the beef?
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