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Fast-Food Chains Going After Sit-Down Diner Dollars

Fast-food chains are targeting cash-strapped patrons of casual-dining restaurants with premium products that are blurring the line between the two dining categories.

One chain boosting its high-end offerings is Burger King Holdings Corp. The No. 2 burger chain has installed a new broiler at over 60 percent of its stores in the U.S. and Canada that can cook foods like thicker burgers, ribs, kebabs and a host of other items that could give sit-down chains like DineEquity Inc.'s Applebee's, Brinker International Inc. Chili's or Ruby Tuesday Inc. a run for their money.

"The lines between a QSR and a casual diner, from a product standpoint, are starting to blur," Goldman Sachs restaurant analyst Steven Kron said, referring to quick-service restaurants, jargon for fast-food chains.

In the same vein, Jack in the Box Inc. soon plans to roll out miniature sirloin burgers, which Chief Executive Linda Lang on Wednesday said are intended to rival the mini burgers sold at casual-dining restaurants.

While premium products can give a tasty boost to sales at fast-food restaurants and can help them stand out among their direct competitors, introducing them during an economic downturn may seem counterintuitive.

Consumers, strained with mounting job losses and dwindling wealth, are responding to low prices right now, with chains like Yum Brands Inc.'s KFC and Sonic Corp. trotting out national value menus for the first time. Higher-priced items could change the perception of the chains offering them, and send value-seeking customers elsewhere.

But Burger King is drawing a circle around the subset of the dining public that can no longer afford the casual-dining experience. With its latest product, a "Steakhouse XT" burger set to hit stores equipped with its new broiler next month, Burger King is hoping a thicker burger patty at a lower price could reel in some new customers.

For "someone who was having a premium burger at an Applebee's or a Chili's that's paying $9 to $11 dollars and can come to Burger King for a Steakhouse Extra Thick burger and pay $5 to $6 dollars, that's value to them," Burger King Chief Executive John Chidsey said at a recent Deutsche Bank conference.

Premium products are nothing new for Burger King, McDonald's Corp. and other fast-food chains, who have sold premium products alongside value items in so-called barbell or multi-tiered pricing strategies. While the value-menus get customers in the door, higher-priced items beef up bills.

To hold onto the value image, chains are adding lower-priced products as well as premium meals. Burger King, for instance, has also added a line of mini-burgers as it plans its premium burger.

McDonald's, meanwhile, is experimenting with its own thicker burger. It has expanded tests of three varieties of an angus burger, a one-third pound burger patty on a higher-end bun, to 1,100 stores, and it's pleased with results thus far, spokeswoman Danya Proud said.

McDonald's has not set a time for a systemwide rollout, partly as it finishes installing premium-coffee capabilities at its stores, although some analysts suggested that the company pushed back the launch of the product due to the economy. Proud would not address that contention, although she said that McDonald's sheer size, with nearly 14,000 U.S. locations, would let the company introduce the sandwich at a good value.

"We have to find a balance because we can't alienate our core customers but we recognize the opportunity to bring in new customers with these items," Proud said.

Fast-food chains may only have a temporary window to use premium products to woo diners who are trading down. Tom Forte, restaurant analyst with Telsey Advisory Group, said casual-dining chains got a boost in sales from last year's stimulus checks. He said there may be some pent-up demand for a meal with waiter service and menus, and that the dining dollars could shift back fast once the economy rebounds..

A meal at a fast-food joint isn't soon going to replicate the dining experience at a sit-down chain, which is one reason that operators in that sector are holding firm.

Susan Lintonsmith, chief marketing officer at Red Robin Gourmet Burgers Inc., said the company is not looking at fast-food places as a greater competitive threat any more than it did before the downturn. Instead, the company is playing up its own value message, which includes offering unlimited steak fries with each classic burger.

"We're trying to make sure they know about our value proposition," Lintonsmith said. "People are still looking for the experience and the quality of the food when they go out."

For the time being, analysts think that fast-food chains will continue to have the edge.

"Given an increasingly difficult consumer environment, we question whether more consumers may be willing to sometimes sacrifice the full service experience with respect to atmosphere and service, particularly when (fast-food) competitors are responding with appealing and premium offerings to meet their needs," Wachovia Capital Markets restaurant analyst Jeff Omohundro said in a recent note.

(Source: CNNMoney.com, 02/18/09)

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