CEO of Carl's Jr parent criticizes dollar menus

McDonald's Corp and other large fast-food restaurant companies have profited from value menus because payments from franchisees are based on top-line sales. At the same time, the people who own franchised restaurants have begun to complain that value menus make it harder for them to break even because their costs for everything from meat and bread to energy, paper and labor are up.

Reuters
July 3, 2008

CEO of Carl's Jr parent criticizes dollar menus
Lisa Baertlein

LOS ANGELES, July 3 (Reuters) - The chief executive of Carl's Jr and Hardee's parent CKE Restaurants Inc said the fast-food industry's dependence on dollar menus to attract customers threatens franchisee profits and could ultimately lower food quality.

"I think it's a bad strategy," CKE Chief Executive Andy Puzder said of the growing use of "value menus" that offer everything from double cheeseburgers and tacos for $1 or less.

"When you lock yourself into a price point, you're screwing up your future because commodity costs are going to increase," Puzder said in an interview with Reuters on Wednesday.

Puzder's dollar menu criticism extends beyond the margins.

He worries that food quality will be the ultimate victim of the industry's push to keep menu prices very low.

"Fast food had started to become better food and I think this takes it in exactly the opposite direction," said Puzder. "Have you been to a grocery store lately? Do you think you could make a burger yourself for 99 cents?"

Carpinteria, California-based CKE, which also operates the Green Burrito and Red Burrito chains, has been incrementally raising prices to offset higher costs. It is contemplating another bump as commodity prices, particularly for beef, head higher, Puzder said.

CKE does sell a limited number of items for 99 cents — so that people looking for dollar meals don't head for the door — but none of its chains market those menu items, Puzder said.

Its Carl's Jr hamburger chain is best known for its decadent, oversized sandwiches which are sold for $2 to $5. Its latest roll-out is a Black Angus burger topped with sliced prime rib, grilled onions, horseradish sauce and Swiss cheese.

Meanwhile, fast-food rivals have been beefing up their value menus, a bid that has boosted traffic as consumers grapple with high gas and food prices amid a housing-led economic slowdown.

McDonald's Corp and other large fast-food restaurant companies have profited from value menus because payments from franchisees are based on top-line sales.

At the same time, the people who own franchised restaurants have begun to complain that value menus make it harder for them to break even because their costs for everything from meat and bread to energy, paper and labor are up.

McDonald's, the world's biggest restaurant chain with sales last year of more than $23 billion, has outperformed most of its rivals with help from its Dollar Menu that includes Double Cheeseburgers, Chicken McNuggets and fries. And this summer, the company is taking the additional step of slashing the price of high-margin beverages to $1.

Yum Brands Inc's Taco Bell has gone a step further with its 79-89-99-cent menu that includes things like tacos, a bean burrito and cinnamon twists.

CKE, which had sales last year of $1.5 billion, is dwarfed by McDonald's and Yum and as a result has less purchasing power. It owns and operates many of its restaurants, so a dollar menu strategy would hammer profits.

"It just wouldn't work for us," said Puzder, who added that CKE is considering a franchisee recruiting campaign "that emphasizes that we're sensitive to them making a profit."

Last year, CKE's annual profit excluding items fell 22 percent, hurt by declining revenues and higher costs. McDonald's annual profit grew nearly 17 percent and Yum posted an 11-percent year-on-year profit rise.

This year, all three companies are expected to post higher profits. Analysts are more bullish on McDonald's and Yum, which also are benefiting from their early investments in overseas markets.

McDonald's and Yum trade at multiples of nearly 17 times and 19 times this fiscal year's estimated earnings, respectively, compared with CKE's multiple of almost 15.

Year-to-date, shares in CKE are down nearly 6 percent, compared with the 3-percent decline in McDonald's shares and Yum stock's nearly 8 percent fall. (Reporting by Lisa Baertlein; editing by Carol Bishopric)


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