"Healthifying" The Fast Food Market

By Greg McFarlane | May 23, 2012 AAA

For decades, quick service restaurants made no pretense to offering anything other than an easy way for diners on a budget to consume dense calories. Get in, get full and get out for little money. But with the nation's collective body mass index ascending ever higher and public pressure coming to bear, fast food chains started expanding and refining their menus. Has that strategy had a noticeable impact on profits?

Fast Food Is Profitable on the Street
When cornered, most people won't admit to eating fast food. Doing so sounds somewhere between gauche and juvenile. But someone must be spending that $170 billion annually, and thus placing McDonald's Corporation, Yum! Brands (parent of Taco Bell, KFC and Pizza Hut, among others) and their competitors among Wall Street's most profitable companies.

Few will argue that fast food's primary selling point is nutrition. Rather, fast food's popularity somewhat obviously derives from its convenience. Even price is far less of a criterion for consuming fast food than is the length of time that elapses between craving and satiation. (If you really do want to save money, instead of eating lunch at Taco Bell, cook it yourself.)

Adapt or Die
Adapt or die is the first rule of the marketplace and, presumably, the worse off a company is, the more likely it is to embrace change. Take Burger King, the formerly longstanding runner-up burger chain, but which in recent quarters has slipped to the bronze medal position behind Wendy's.

SEE: 7 Reasons Wendy's Surpassed Burger King

In April Burger King drastically overhauled and enhanced its menu, adding items not heretofore classified as fast food. Tropical mango smoothies and Quaker oatmeal are outliers for Burger King, the kinds of things someone eats on their way to and from the gym. Nor do blended fruit drinks and hot cereal warrant apologies or justifications to passersby, even when sold in Burger King packaging. It's part of a slow but relentless shift in branding, as fast food restaurants disassociate themselves from being perceived as nothing more than catalysts of general-purpose weight gain.

Legal Concerns
One objective of that strategy is to quiet the catcalls from advocacy groups. But that will always be less important than focusing on the bottom line. As the perennial market leader, McDonald's received more than its share of brickbats for its then-limited menu a decade ago. The Dow Jones stalwart responded by becoming the most prominent chain to offer salads, fruit and yogurt parfaits and even apple slices. Wendy's recently followed suit, and today apple slices seem to be the definitive "healthy option" for the fast food chain looking to distance itself from the long-held connotation of dealing in grease and other lipids.

For Profits or for PR?
So does revamping the menu make a difference? That is, beyond any public relations value? Well, for Burger King it's clearly too early to tell. McDonald's doesn't disclose per-item revenue and profit data, but it's fair to assume that the innovative non-traditional menu selections at McDonald's aren't there purely as loss leaders.

A company spokeswoman gives it a positive spin: "We would not have (smoothies, oatmeal, et al.) on the menu if we were not selling them at a rate that we could sustain them at." In other words, it (probably) isn't costing McDonald's anything to keep such items available. At best, they're there for the benefit of the niche customers, not the clientèle at large.

Other POVs
Perhaps the frankest breakdown of fried versus fresh comes from Andy Puzder, the CEO of Carl Karcher Enterprises. His company is the parent of twin burger chains Carl's Jr. and Hardee's, the latter of which sells the infamous 10 one-third ounce, 1,290 calorie Thickburger. Hardee's does also sell a side salad slathered with cheese, which makes Mr. Puzder's comment particularly noteworthy: "We have wonderful, healthy foods if people want to buy them. But they don't sell particularly well."'

Profit Margins Are Increasing
They might not sell well, but as larger chains have proven they don't need to. Fruit smoothies might not be biggest sellers at McDonald's, but the smoothies have some of the highest profit margins on the menu. This isn't surprising, given that a fruit smoothie has fewer ingredients than a hamburger, takes fewer steps to create and doesn't require anyone to cook it. All told, the newer, less fattening menu items at McDonald's provided much of the impetus for a 7% boost in profits over the most recent quarter. (That figure excludes sales from new locations, thus keeping numbers normalized year-over-year.)

SEE: How To Analyze Restaurant Stocks

The Bottom Line
A change in response to market demand almost always results in a better product (and by definition, a more popular one.) When former Kentucky Fried Chicken franchisee Dave Thomas founded Wendy's in 1969, it's doubtful that apple pecan chicken salads were the first things on his mind. Today, it's hard to imagine a major chain not offering low-fat, nutritionally sound choices to discriminating customers. For the fast food industry's market leaders, "healthifying" the menu across the board seems to make prudent business sense, too.

comments powered by Disqus
Related Articles
  1. Is Retirement Good For You Or Bad For ...
    Retirement

    Is Retirement Good For You Or Bad For ...

  2. Ebola's Economic Impacts on Liberia, ...
    Economics

    Ebola's Economic Impacts on Liberia, ...

  3. 10 Characteristics of Successful Entrepreneurs
    Entrepreneurship

    10 Characteristics of Successful Entrepreneurs

  4. The Big Credit Card Companies Have Room ...
    Stock Analysis

    The Big Credit Card Companies Have Room ...

  5. Why Wall Street Is A Key Player In The ...
    Investing Basics

    Why Wall Street Is A Key Player In The ...

Trading Center