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BusinessWeek: January 11, 1993 |
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Industry Outlook: Services
THE HUNGER PANGS LET UP A LITTLE Independent restaurants face the least-palatable prospects. Even before the economy faltered, many of them found it hard to compete with deep-pocketed chains. That's largely why independents now account for just 56% of all U.S. restaurants, down from 63% in 1986, says Peter H. Oakes, a vice-president at Merrill Lynch. And the chains will bite off more market share again this year: Their sales will grow by an estimated 8%-twice as fast as those of independents, predicts Ronald N. Paul, president of Chicago-based consultant Technomic Inc. He sees net margins for the 94 largest public chains widening to 7.5% from 7% in 1992. "SO MANY CHOICES" The chains will keep pouring it on. McDonald's, Burger King, Wendy's, and Hardee's all figure that if they lure more customers with selectively lowered prices and bargain meal combinations-by delivering value, in industry parlance-they can offset the damage lower prices do to revenues. McDonald's Corp. is guaranteeing customer satisfaction, even if it means giving diners a new meal gratis. "The challenge is to exceed customers' expectations, because they have so many choices," says H. Stephen McManus, executive vice-president for TW Services Inc., Hardee's No. 1 franchisee and the operator of units of three other chains. The chains have several reasons for optimism. Overseas expansion will give a big lift to such companies as PepsiCo Inc.'s Kentucky Fried Chicken and McDonald's. Another Pepsi chain, Pizza Hut, plans to open 300 new units abroad in 1993, the same number its opening in the U. S., says President Allan Huston. And with the domestic economy moving again, more brown-baggers are likely to trade up to quick-service meals. Some recently revitalized operators will keep heat on the leaders, however. "This is a market-share battle, and we've got to take business away from others," asserts Frank J. Belatti, new chief executive of AFC Inc., the renamed parent of the Church's and Popeye's fried-chicken chains, which recently emerged from bankruptcy. AFC (short for America's Favorite Chicken) has a more manageable debt load of $250 million, down from $400 million, since it reorganized in September and lenders agreed to convert some debt to majority ownership. Now, it will expand its menu and spend $100 million a year to refurbish its 800 company-owned units. LOSING WEIGHT. TW Services is also trying for a fresh start. In November, it got $300 million from Kohlberg Kravis Roberts & Co. in exchange for a 47% equity stake. Its debt-to-equity ratio is still 7.8 to 1, down from 12.6, but it has cut borrowing costs by refinancing at lower rates for longer maturities. Some of its new cash will go toward expansion and product development. Gilbert/Robinson Inc., parent of 93 Houlihan's, Darryl's, and other units, came out of Chapter 11 in 1992 with its debt halved, to $100 million, and interest payments cut to $10 million a year from $25 million, says President Frederick R. Hipp. In the midpriced segment, a slew of small but fast-growing chains will likely continue to ring up strong growth. For instance, steakhouse chains such as Lone Star, onghorn, and Outback are defying the conventional wisdom that Americans are eating less red meat. With an average tab of about $18, they seem to have found a growth niche between lower-cost chains such as Ponderosa Inc. and Sizzler International Inc. and white-tablecloth steak joints. Other casual-dining restaurants, including Chili's and General Mills's Olive Garden, should also continue to do well this year. Some chains can expect tougher going, of course. After surging 12% a year during the 1980s, fast-food-pizza chains' domestic sales were flat in 1992. To revive growth, Pizza Hut is rolling out a $3.99 lunch buffet featuring pizza, pasta, and salad fixings, and it's expanding aggressively into nontraditional sites such as college campuses and kiosks. Some regional chains have fewer options. Ohio-based Rax Restaurants Inc., which specializes in roast-beef sandwiches, has been unable to keep up with national rivals and filed for Chapter 11 last November. Whatever their prospects, restaurant operators know that customers won't sit still for big price hikes. Proprietors are counting on weak commodity prices to help keep average checks in line. After dropping 4% last year, the price of food and packaging is expected to remain flat in 1993. That's one reason TW Services thinks it can hold increases in its menu prices to about half the expected U. S. inflation rate of 3%. After all, in a year when growth is slow and competition fierce, no restaurateur can afford to give customers sour stomachs with an overpriced menu. | |
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