Food Court Press : Oversaturation Has Industry Seeking Ways to Beef Up Sales

Hungry shoppers who tell friends to meet them at the McDonald’s in San Diego’s Stonecrest Plaza need to be a bit more specific.

That’s because the massive center houses three McDonald’s outlets--a traditional one and two express counters in the Wal-Mart and Incredible Universe stores.

The bid to corner the burger market in the San Diego shopping center illustrates the challenge facing fast-food giants like McDonald’s and Irvine-based Taco Bell as they scramble to revive domestic sales, industry observers say.

“Over-saturation of the fast-food restaurant segment is a well-guarded secret,” said Carlsbad, Calif.-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 rises and spark double-digit earnings. But as the supply of can’t-miss locations dwindles, chains have become increasingly dependent on their existing stores.

In the industry, “same-store sales”--that is, sales at stores open at least a year--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--witness this week’s ousting of longtime Taco Bell Corp. President John Martin and McDonald’s appointment of Chief Financial Officer Jack M. Greenberg as chairman in charge of its stalled U.S. operations.

Some chains are going on buying sprees in hopes of building revenue, market share and, they hope, earnings.

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

Restaurants are popping up in a wider variety of places--such as the McDonald’s in Home Depot’s Marina del Rey store. And chains are also pairing up under the same roof, as in the Taco Bell/KFC restaurant in Westchester.

Scouting out 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 pursuing alternative locations and buying up other chains carry risks too.

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

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As they tackle the thorny problem of where to build restaurants, operators also are struggling with the tough matter of designing menu items that will lure consumers who are being bombarded with an ever-increasing array 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 $1. 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 soon fast-food operators were slugging it out with 99-cent burgers and 39-cent tacos. But chains also recognized that the burger-taco wars were making a wreck 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 last year after the chain abandoned its ill-starred venture into value pricing.

Restaurant industry observers say that it’s now up to new Taco Bell President and Chief Executive John F. Antioco, 46, most recently president and chief executive of the Circle K convenience store chain, to hit a home run--or at least to score enough singles to get the chain back into the game.

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

While revamping ailing Circle K, Antioco preached that the chain couldn’t afford to offer only convenience--Antioco argued that customers want both value and convenience.

To that end, he stuffed Circle K shelves with hot brands and sold them at 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 his 13 years leading the company. 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.”