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Burger battle
Price wars have McDonald's, Wendy's and Burger King feeling the heat.
December 11, 2002: 1:41 PM EST
By John Chartier, CNN/Money Staff Writer

NEW YORK (CNN/Money) - Hold the pickles, hold the lettuce...on second thought, hold the whole order.

That's the response many fast food chains are hearing more these days from customers whose changing tastes and bargain-hunting have the likes of McDonald's, Burger King and Wendy's locked in a price war.

McDonald's, the world's biggest restaurant chain, has been struggling with sagging sales while AmeriKing, one of Burger King's main franchisees, recently filed for Chapter 11 bankruptcy protection from creditors, in part because of the recent price wars that have undercut profits.

And while sales at Wendy's International (WEN: unchanged at $26.71, Research, Estimates) have been rising, the No. 3 burger chain recently lowered its profit forecast for the year. Meanwhile, Diageo, the British firm that owns Burger King, has been having trouble finding a buyer for the chain, though it said last week it expects to sell the business in December to a consortium led by Texas Pacific Group.

"There seem to be several trends combining to pull people away from fast food," said Michelle Roehm, assistant professor of marketing at Wake Forest University in Winston-Salem, N.C. "We're fatter than we've ever been here in the United States... fast casual is definitely growing."

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The turmoil has led the big fast-food chains to take a variety of steps before the fat really hits the fryer.

Last week, McDonald's Corp. (MCD: down $0.26 to $17.09, Research, Estimates) CEO Jack Greenberg said he plans to retire at the end of the year. Greenberg's retirement comes as the world's largest restaurant chain continues to struggle with sagging sales and new menu items that have failed to strike a chord with customers.

Salomon Smith Barney analyst Mark Kalinowski told the New York Times last week that investors have been clamoring for a leader at McDonald's who can be an "agent of change."

Burger King is offering 99-cent Whoppers to better compete with McDonald's, which began offering a value menu in the fall with a range of items for $1. Wendy's has always offered a value menu.

The stocks of these companies have taken a hit as cheaply priced burgers cut into margins and consumers increasingly show a taste for fast-casual dining at such places as Panera Bread and Darden Restaurants' Olive Garden, where they can eat higher-quality food and have a sit-down restaurant experience, analysts said.

Shares of Oak Brook, Ill.-based McDonald's are off 41 percent from their 52-week high of $30.72, and Dublin, Ohio-based Wendy's shares are off about 35 percent from their high of $41.60. Meanwhile, shares of Louisville, Ky.-based YUM Brands (YUM: down $0.23 to $22.27, Research, Estimates), the owner of Taco Bell, Pizza Hut and KFC, are off 29 percent from their $23.68 high.

Kalinowski maintained his "underperform" rating on McDonald's saying in a Dec. 3 research note that McDonald's dollar menu is simply not generating enough sales to make a significant difference.

Part of the problem stems from an increasing shift toward slightly more upscale fast-casual dining, some analysts said.

"I just think casual dining has become so much more affordable that whether you eat at home or in the restaurant, more people are trading up from fast food to the casual dining experience," said Jonathan Mueller, equity analyst for the AIM Constellation Fund, which owns Wendy's and YUM Brands. The fund does not own McDonald's.

Mueller said part of McDonald's problem is that they have saturated the U.S. market with 15,000 restaurants, leaving little room for growth. The company is left trying to come up with new gimmicks such as the dollar menu to lure customers into the stores.

These factors, he said, have given customers little reason to keep coming back, particularly when they are being enticed by the growth of so-called fast-casual restaurants.

Both McDonald's and Wendy's recognize this trend to more upscale casual dining, and are positioning themselves to compete at that level, Mueller said.

McDonald's recently acquired Denver-based Chipotle Mexican Grill while Wendy's earlier this year bought Baja Fresh, a fast-casual Mexican food chain and has taken a stake in Cafe Express and Pasta Pomodoro.

"This is really preparing us for 7-10 years down the road," Wendy's spokesman Bob Bertini said. "Right now, we think that, with roughly 5,400 Wendy's in the U.S., over the next decade we can double that number, but you have to look ahead in terms of profit streams."

Recent lawsuits by customers who claim fast food restaurants contributed to their obesity and lingering worries over mad cow disease, while not having a serious impact on stock prices, has added to the negative publicity surrounding these chains and helped fuel demand for more fast-casual dining, Mueller said.

Others agree.

Roehm said fast-casual restaurants offer customers the chance to have a sit-down meal, eat higher quality food and not have to pay the premium price of a more upscale restaurant.

Though fast food restaurants are beginning to offer more fast-casual, don't look for McDonald's, Wendy's and Burger King to start getting out of the burger business any time soon, says Mueller. Investors want to see these companies refocus on their core brands.

"I would rather see McDonald's say we're not a growth stock anymore and we're going to close underperforming stores and become more of a reset the bar-type of company," Mueller said, adding that ending the margin-eroding value-menus would also help.  Top of page




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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.