Fast-Food Area Feels the Heat : Taco Bell, Carl’s Jr. Among Chains Trying to Beef Up Sales

The cafeteria in Taco Bell’s headquarters building sums up the promise and potential facing the nation’s fast-food leaders.

There, diners can order a burrito from Taco Bell, Hot Wings from KFC or a sausage pizza from Pizza Hut.

The competitive situation is much the same elsewhere in Orange County, where hungry consumers can stop at just about any street corner and find a smorgasbord of fast-food options. And while that’s mouth-watering news for consumers, it’s a potential case of heartburn for restaurant operators.

“Over-saturation of the fast-food restaurant segment is a well-guarded secret,” said Carlsbad-based restaurant industry analyst Hal Sieling. “A lot of chains have depended upon growth, but with them all chasing the same Holy Grail, sooner or later you come to the point of saturation.”

For years, chain operators and their franchisees have relied on newly opened restaurants to drive revenue hikes and spark double-digit earnings. But as the supply of can’t-miss locations dwindles, chains are increasingly dependent upon their existing stores.

In the industry, “same store sales” are an important yardstick when it comes to measuring a chain’s long-term financial health. And, when same-store sales stall, so do quarterly earnings.

That can make shareholders antsy--as witnessed by Thursday’s ousting of long-time Taco Bell Corp. President John Martin and McDonald’s appointment of Chief Financial Officer Jack M. Greenberg to the new post of chairman in charge of its stalled U.S. operations.

Some chains are going on buying sprees in order to build revenue, market share--and, hopefully, earnings.

Anaheim-based Carl’s Jr. in August paid $42 million for the Taco Bueno chain, with 109 units in Texas and Oklahoma, and McDonald’s is converting 184 Roy Rogers eateries that it bought in August.

Restaurants also are popping up in a wider variety of locations--like the McDonald’s in Home Depot’s Marina Del Rey store. Chains also are pairing up under the same roof, like the combination Taco Bell/KFC restaurant in Westchester.

Scouting out new locations for restaurants “was one of John Martin’s major strategies, and it influenced how the rest of the industry works,” said Irvine-based restaurant industry analyst Randall Hiatt.

But alternative locations and buying up other chains can lead to their own problems.

Carl’s Jr. could dig itself a deep hole if it can’t operate Taco Bueno profitably. And increasingly frustrated franchisees grumble that the growing number of nontraditional restaurant locations is cannibalizing their sales.

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As they tackle the thorny problem of where to build restaurants, operators also are struggling with the tough question of designing menu items that will lure in consumers who are being bombarded with an ever-increasing wealth of choices.

The key to Taco Bell’s success during the late 1980s and early 1990s was Martin’s revolutionary decision to load up the chain’s menu with items costing less than one dollar. The strategy immediately clicked with young male consumers who eat most of the fast food served up in this country.

Customers were the clear winners as burger chains countered with their own value-oriented menus and fast-food operators slugged it out with 99-cent burgers and 39-cent tacos. But chains also recognized that the burger-taco wars were making a shambles of profit margins, and now they’re rethinking pricing strategies.

The value path “has been fairly well beaten down,” Hiatt said. “Now what we’re seeing is a shift away from the price wars. That’s clearly what McDonald’s is doing with its Arch Deluxe. The trend is toward products with fatter margins.”

Two smaller chains offer proof that fatter burgers can translate into fatter bottom lines.

Wendy’s International Inc. stayed above the burger fray in recent years, and built solid margins with its higher-priced fare. And Carl’s Jr.’s stock rocketed to above $30 from $6 in the past year after the Anaheim-based chain abandoned its ill-starred venture into value pricing.

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Restaurant industry observers say that it’s now up to new Taco Bell President and Chief Executive John F. Antioco, most recently president and chief executive of the Circle K convenience store chain, to hit a home run--or at least cobble together a string of singles to get the chain back into the game.

Analysts say that Antioco’s track record at Circle K--where he pulled the company out of bankruptcy and arranged its sale to Tosco Corp. for $710 million--shows that the 46-year-old executive knows that convenience alone isn’t enough when consumers can find convenient fast-food alternatives on every other corner.

While revamping the ailing Circle K, Antioco preached that the chain couldn’t afford to offer convenience alone; he argued that customers wanted both value and convenience. To that end, he stuffed Circle K shelves with hot brands and sold them for supermarket-like prices.

Analysts say his next challenge--restoring the luster at Taco Bell--will depend on how well he can build upon the strong foundation that Martin fashioned during 13 years at the helm. The only certainty is that the chain can’t rest on its laurels.

“Fast food is a lot like Hollywood,” Hiatt said. “You’re only as good as your last movie.”