Squeeze in Fast Food

Big washout ahead

For more than a decade, the fastest thing about the fast-food industry has been its growth -in outlets, sales and profits. No area of the business has prospered more than the giant hamburger chains, dominated by McDonald's and its two smaller cook-alikes, Burger King and Wendy's. But lately, increasing costs and competition have taken some of the sizzle out of the chains. Says Wendy's Chairman R. David Thomas: "There's a big washout coming."

The chains still have room to grow, and their earnings, though slowing somewhat, will probably remain strong by any standards. But there is a growing consensus in and out of the industry that the old days of runaway expansion are over and a tough period of scrambling for new customers and healthy returns lies ahead. A basic problem has been the rising cost of food, especially meat; beef prices jumped 30% last year, and some experts say they could increase by 50% this year. The chains have thus been forced to charge more; McDonald's raised its prices last year by about 14%. But higher costs are causing people to order down -to pass up the $1.05 Big Mac for a 500 regular hamburger, buy smaller portions of French fries and cut out dessert.

Another factor has been the increase in the minimum wage, which went from $2.65 to $2.90 on Jan. 1. Higher fuel prices and gasoline shortages may also hurt the chains because people will be less inclined to drive out for a meal. Indeed there has been a quick rise in supermarket sales of fast-food fixin's to prepare at home.

Meanwhile, the hamburger heavyweight, McDonald's, is being challenged by hungry competitors, notably Burger King, a subsidiary of Pillsbury Co. McDonald's 5,200 outlets, which account for about 20% of the $20 billion spent last year on fast food, generated earnings of $163 million on sales of $4.6 billion in 1978. McDonald's opened 500 new outlets last year and expects to continue expanding at that pace for the next three to five years. But that cannot make up for the slowdown in annual earnings growth, which dropped to 19% last year from roughly 40% five years ago. Since last fall the average month-to-month sales rise at McDonald's stores, which used to be 9%, has slipped to 5%. Reflecting these developments, McDonald's stock has declined from the 1978 high of $60 a share to last week's close of $41.25. McDonald's plans to continue to direct its $200 million-a-year advertising campaign toward kids, but it will also begin pushing more vigorously for the adult trade. Its breakfast business is growing, and the company is experimenting at selected sites with a dinner menu that includes chicken pot pies and fried chicken sandwiches.

Burger King, with 2,500 outlets the second largest chain, plans to open about 350 new ones this year. Though Pillsbury does not report separate sales and profit figures for Burger King, analysts believe that the chain is expected to manage better than its rivals. A major reason: the chain was fastest in diversifying its menu. Besides hamburgers, it offered chicken, fish and ham-and-cheese sandwiches.

Wendy's, founded in Columbus only a decade ago, is a highly successful upstart. Its distinctive outlets, with their Gay Nineties decor, have been popping up all over the country. Last year alone Wendy's opened 502 units, bringing the total to 1,400. One result: the company's earnings surged 56%, to $23.2 million, on sales of $783 million. Even so, analysts say, average sales advances in Wendy's shops have slowed in recent months, and they expect that deceleration to continue. Still, Wendy's intends to stick with its limited line of hamburgers and chili, though some industry experts believe that this will make the company especially vulnerable to the rise in beef prices. Whatever strategy the chains choose, they are already on the edge of the frying pan. The big problem for the years immediately ahead will be to stay out of the fire. --

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