Fast food Chains Steady as Fine Dining Takes Dip

When times get tough, Americans think fast.

As the United States slipped into a recession during the first half of 2001, Americans cut back on fine dining, but most fast-food restaurants continued to do well primarily because of their low prices — generally less than $6 per meal.

The restaurant industry as a whole seems to be somewhat recessionproof. The nation’s 858,000 restaurants are expected to hit $407.8 billion in sales this year, according to the National Restaurant Association. That’s an increase of 3.9 percent over 2001. U.S. restaurant sales are expected to hit $577 billion by 2010 and account for 53 percent of the money spent on food.

The 5,245 restaurants in Arkansas are expected to bring in $2.1 billion in sales this year. That’s a 4.1 percent increase over last year.

But compared to previous growth, 2001 was a bad year for restaurants, particularly from Sept. 11 through the end of the year.

Over the past 25 years, dining out has come to be viewed as a necessity rather than a luxury. During that time, inflation-adjusted restaurant sales have declined only twice — by 0.1 percent in 1980 and 1.1 percent in 1991. People have less time, more women are in the workplace, and baby boomers are at the prime money-spending age of life.

“This was a growth industry,” said Mike Carney, a food-industry analyst with Stephens Inc. “It started really in the 1970s. We saw double-digit sales growth for 20 or 25 years. Now, it just settled back to a single-digit growth.”

Businesspeople often entertain clients by taking them to fancy restaurants, so if business suffers, fine dining also suffers. Although fine dining is down, fast-food and casual dining are holding steady, Carney said.

“When the economy takes a downturn, restaurants still seem to do well,” he said. “The whole eating out concept, at all restaurants, has become a lot less cyclical than it was 30 years ago.”

In Northwest Arkansas, sales at fast-food restaurants appear to be in line with the rest of the nation.

K-Mac

Brent McGruder, president of K-Mac Enterprises Inc. of Fort Smith, the nation’s second-largest Taco Bell franchisee, said his company will bring in $127 million in sales this year. K-Mac currently has 122 Taco Bells and 34 KFC restaurants (formerly known as Kentucky Fried Chicken). Eighteen K-Mac locations house both a Taco Bell and KFC.

All of K-Mac’s stores are located in Arkansas, Oklahoma, Texas and Missouri. With five new restaurants scheduled to be open next year, McGruder said company sales should hit $137 million.

“Since Sept. 11 [2001], the fine dining restaurants were hurt pretty bad,” McGruder said. “We didn’t see an immediate impact … Would we have had more sales if it hadn’t happened? I don’t know.”

So far this year, same-store sales are up 7.1 percent at K-Mac’s Taco Bell restaurants and 2.9 percent at the company’s KFCs.

McGruder noted, though, that the same-store sales increase at his Taco Bell stores looks impressive because sales were actually down the year before.

K-Mac’s same-store sales percentages were slightly behind the national average for Taco Bell and slightly ahead of the curve for KFC. According to the quarterly reports for Yum! Brands Inc. of Louisville, Ky. (which owns Taco Bell, KFC, Pizza Hut, Long John Silver’s and A&W International), for the first three quarters of this year nationwide, same-store sales were up an average of 8.7 percent for Taco Bell and 2.7 percent for KFC.

K-Mac’s restaurants sell 450,000 meals per week. The company uses 14,000 pounds of beef and 4,000 head of chicken per day.

Business is going so well this year that McGruder has three new KFC stores planned for Northwest Arkansas: one that is scheduled to open in Siloam Springs in late October and new stores that will be built in Fayetteville and Bentonville. The company currently has 10 Taco Bells and two KFCs in Benton and Washington counties combined.

Big N’ Tasty

McDonald’s Corp. has been in a slump for more than a year now. (See article here.) To woo customers back, McDonald’s has slashed prices and introduced a $1 menu that went into effect Oct. 4 in Northwest Arkansas and will go nationwide in November.

“The Big N’ Tasty was $2.09. Now it will be $1,” said Bill Mathews, whose Mathews Management Co. of Springdale has 23 McDonald’s restaurants, all of which are in Northwest Arkansas. “I think everybody is more value oriented … We see and hear it from our customers. You’ve got some people who are really looking for price points. Maybe they don’t want a whole meal, just a sandwich and a drink.”

Will he make any money on that $1 Big N’ Tasty sandwich?

“No,” Mathews said.

But diners likely will want some fries with that and probably a drink as well. So they may be spending $3 for a meal. They’re just not getting it bundled together as a $3 combo meal. It’s sort of like ordering “Mc a la carte.”

McDonald’s has pretty much saturated the marketplace in Northwest Arkansas, but if there’s a strip of commercial highway that doesn’t have a golden arches sign, you’re likely to find other chains like Sonic, Burger King and Wendy’s have filled that market cavity.

“There are a lot more quick-service restaurants than there ever had been, including in Northwest Arkansas,” Mathews said. “When you build the number of restaurants that we’ve built in this market … we’ve outpaced the population growth in the area.”

Mathews wouldn’t reveal his same-store sales change from last year. But he did say his Northwest Arkansas restaurants are doing better than McDonald’s nationwide. In September, McDonald’s reported that companywide, same-store sales declined by 2.7 percent in the United States and 0.7 percent in Europe. By comparison, Wendy’s International Inc. of Dublin, Ohio, reported a same-store sales increase of 5.9 percent for its U.S. restaurants for the month of September.

Mathews Management also doesn’t reveal sales figures, but the company’s restaurant that opened last year on Fayetteville’s Joyce Boulevard has remained since then in the city’s top 10 based on gross revenue. City tax records for December through July (the most recent month available) indicate the Joyce Boulevard McDonald’s brought in $1.2 million in revenue during that period. The seven McDonald’s stores in Fayetteville took in a total of $4.7 million during that eight-month period.

To show an example of how upstart chains have been luring away McDonald’s customers, take a look at the Chick-fil-A store in Fayetteville’s Northwest Village shopping center. It had sales of $1.3 million for the same eight-month period in this part of the country where chicken is king.

K-Mac’s Taco Bell on U.S. Highway 62 in Fayetteville had $1.06 million in sales for the same period. Red Lobster is the city’s leader with $2.58 million in sales for the eight months.

For a comparison, the national average for annual sales in 1999 was $625,000 at full-service restaurants and $572,000 at fast-food restaurants.

Mathews said the franchising company he and his brother, Walter, own has opened three new McDonald’s restaurants so far this year. All of those were located in Wal-Mart Supercenters, so Mathews refers to them as “McMarts.”

The new stores that opened in Wal-Marts in Springdale and Siloam Springs are bringing in 30 to 35 percent more in sales than the one on Mall Avenue in Fayetteville. Remember the old saying that it’s all location, location, location? Mathews attributes the increased sales to the McMarts being located at the front of the Wal-Marts in Springdale and Siloam Springs. In the Fayetteville Wal-Mart, the McDonald’s took over space at the back of the store that had been home to a Wal-Mart branded Radio Grill.

Bill Mathews taught a class at Hamburger University during early October at McDonald’s headquarters in Oak Brook, Ill.

Sonic Boom

Pete Esch, president of Benton Properties Inc. of Rogers, said he has seen same-store sales jump about 13 percent so far this year at his company’s 52 Sonic Drive-Ins. But that’s because they began serving breakfast this year.

Even without the breakfast, though, Esch said sales would be up by 5 or 6 percent.

“I think we’re doing fine, but it seems to me that casual dining is doing well, too,” Esch said. “Or at least that’s the way it appears to me when I go by them, the Chili’s and all.”

Esch was referring to the casual dining restaurants in Rogers’ Scottsdale Center area. He noted, though, that Northwest Arkansas appears to be faring better than the rest of the nation economically, and that could benefit the casual dining restaurants, which charge a little more for meals than the fast-food places.

“I think it’s getting harder and harder to maintain same-store sales increases,” he said. “But if there’s any segment of the industry that’s recessionproof, it’s fast food.”

Esch, who has been a Sonic franchisee for 32 years, said he owns 31 Sonics in Arkansas and 16 in Northwest Arkansas. The only area Sonics he doesn’t own are the five in Fayetteville, which are owned by Kenny Smith. Smith could not be reached for a comment.

Esch wouldn’t reveal the his company’s annual revenue. He doesn’t foresee Sonic dropping the price of its basic hamburger to $1 to compete with McDonald’s and Burger King.