Fatty fast food drops Priszm’s market share

When it first went public in 2003, Priszm appeared to be a finger-lickin’ good deal. But its decline since then demonstrates how quickly a shift in popular habits and ineffective marketing can erode the value of even famous brand names. A unit in Priszm is now worth about 60 cents, 94 per cent less than its $10 IPO price. While shareholders may be feeling indigestion over the results of the past few years, management has enjoyed substantial rewards.

The Globe and Mail
June 23, 2010

Fatty fast food drops Priszm’s market share
Operator of KFC, Taco Bell and Pizza Hut restaurants loses ground as people turn to healthier options
Tim Kiladze

KFCPriszm.jpg

Priszm, which operates KFC, Taco Bell and Pizza Hut in Canada, saw its shares drop to 60 cents. Sarah Dea for the Globe and Mail

Alexandra Loeb popped into a KFC outlet in Toronto on a busy Toonie Tuesday last week to pick up dinner for her boyfriend who she said “has a metabolism like nobody’s business.”

However, the 26-year-old ordered only a soft drink for herself, because she tries to avoid fast food. “It’s processed food, it’s not fresh, it’s fried. It’s just not good for you.”

The growing trend to healthy eating is just one of many problems facing Priszm Income Fund (QSR-UN.T), operator of more than 430 KFC, Taco Bell, and Pizza Hut restaurants across seven provinces.

When it first went public in 2003, Priszm appeared to be a finger-lickin’ good deal. But its decline since then demonstrates how quickly a shift in popular habits and ineffective marketing can erode the value of even famous brand names.

A unit in Priszm is now worth about 60 cents, 94 per cent less than its $10 IPO price. While shareholders may be feeling indigestion over the results of the past few years, management has enjoyed substantial rewards.

Executive chairman John Bitove received $497,000 in total compensation from Priszm in 2009, a considerable raise from the $382,000 he took home in 2006, the last year in which Priszm was profitable. Bitove, a serial entrepreneur who also runs Scott’s REIT, XM Canada and new cellular provider Mobilicity, declined to be interviewed for this story.

Since Priszm began to lose money in 2007, its six-person management team has seen five departures. Those who left received average departure compensations of about $250,000.

But despite the turnover on the executive floor, Priszm has had little success in dealing with consumers’ growing appetite for healthier fare.

The trust’s restaurants aren’t “appealing to most people in the marketplace, especially not to baby boomers, and baby boomers are the drivers of everything, including food services,” said Doug Fisher, president of FHG International, a food services consulting firm.

Many younger people are getting the nutritional message as well. “My 16-year-old is an athlete and [he] prefers to go to Tim Hortons and Subway and have a sandwich he doesn’t consider that bad for him,” Mr. Fisher said.

The past year has been particularly ugly for Priszm. In November the fund halted monthly distributions to unitholders. A month later, it sold its Toronto-based Sequel food processing facility, which supplied salads, for $11.5 million. It even stopped printing its annual report, switching to a Web-only version, to save money.

Same-store sales dropped 7.1 per cent in the first quarter from the previous year, leading to a quarterly loss of $4.8-million. The fund owes $102-million and has hired Canaccord Genuity Corp. to advise it on a refinancing.

Confronted by changing consumer tastes, other fast-food purveyors have introduced healthier menu options and stepped up their marketing.

Last year, in a sign that Priszm may be looking to refresh its image, it handed marketing over to Yum! Canada, a unit of Yum! Brands, the U.S. parent of KFC, Taco Bell and Pizza Hut. Since taking over the account, Yum! has implemented KFC’s Streetwise value menu, which offers cheap lunch and dinner items.

Erin O’Keefe, director of strategy and engagement at Interbrand, a brand consultancy, believes a dash of improved marketing could make Priszm’s offerings considerably more appetizing.

She points to the example of McDonald’s. The fast-food giant markets itself as a healthy option even though the majority of its offerings are high in fat, she says. Customers “have the perception of choosing things like apple slices even if they order a Big Mac.”

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