The fast food industry is quickly changing, and this week we’ve seen two major examples.
On Tuesday, Yum Brands (NYSE:YUM) announced that it was selling its Long John Silver’s and A&W restaurants. The company said it was shedding the brands in an effort to focus on growth in China and other international markets. Apparently, the Chinese don’t have a palate conducive to fish sticks and root beer.
Then on Thursday, Wendy’s/Arby’s Group (NYSE:WEN) announced plans to sell its struggling Arby’s roast beef sandwich chain so that it can focus on its Wendy’s outlets.
The Yum move actually makes a lot of sense, as the company receives the majority of its profits from outside the U.S. Brands such as KFC, Pizza Hut and Taco Bell are big hits in Asia, Europe and even Africa, and that’s where Yum executives think the real growth will continue to come from in the years ahead. As Yum Chief Executive Officer David Novak said, “We do not believe Long John Silver’s and A&W-All American Food restaurants fit into our long-term growth strategy.”
The Wendy’s/Arby’s Group decision also is a wise one. Arby’s North American restaurants, the division that generates the bulk of the Arby’s chain revenue, have lagged the rest of the industry in sales for some time, so it’s no real surprise that the company wants to focus on the better-performing Wendy’s chain.
The moves have come at what could be considered a critical juncture for the fast food industry. According to the ChangeWave Alliance Research Network’s December Consumer Spending Report, there’s been a major improvement in restaurant spending nearly across the board. The only exception to the uptrend in willingness to spend more money on restaurants is in the fast food segment.
According to the Alliance report, 17% of survey respondents say they’ll spend more money at restaurants over the next 90 days, a healthy improvement over the November measure and the highest level in a ChangeWave survey since last May. When respondents were asked which types of restaurants they plan to eat at more or less often over the next 90 days, higher-end categories such as “upscale/fine dining,” “high-end casual” and “moderate casual” restaurants all showed a burst of momentum going forward. Conversely, the lower-end categories such as “quick casual” and “fast food” restaurants showed little-to-no forward momentum.
The shaking of the fiscal menu, as well as the focus on international markets and core businesses is a trend that’s likely to continue in the fast food industry, so it wouldn’t come as a big surprise if even powerhouse companies like McDonald’s (NYSE:MCD) and Starbucks (NASDAQ:SBUX) begin making adjustments to their operations in the wake of changing sector conditions.
Investors who want to play the sector will be well served by picking their menu items carefully in 2011, as the changing industry landscape could cause a lot of indigestion along the way.
As of this writing, Jim Woods did not own a position in any of the stocks or funds named here.