Fast Food Chains Left With Multiple Hurdles

by: Adam Alvarez

It's safe to say consumers flock to fast food restaurants for two reasons. Those being quick service and low costs with the low costs often times being the main motivator. Still, offers such as the value meal may soon be a thing of the past.

The Department of Agriculture already expects a 3%-4% rise in food prices in 2013. After reportedly only increasing 0.5% last year, such a steep climb in prices could leave consumers eager to save money while also leaving fast food chains in a precarious situation.

For now, Burger King (BKW), McDonald's (NYSE:MCD) and Wendy's (NYSE:WEN) are still battling to appease customers. Wendy's "Right Price, Right Size" offer takes a hairline approach to bringing the company profit while still providing some items, although fewer in number, for as low as $0.99.

Meanwhile, McDonald's and Burger King have already been forced to climb to the $1 plateau and above. However, poor consumer reaction such as the one McDonald's faced upon rolling out the "Extra Value Menu" which featured items nearing $2 have prevented these companies from focusing squarely on profitability.

Thus, McDonald's has found itself pushing its original Dollar Menu while succumbing to the increased costs. For how long the chain can continue on such a path, though, remains the ominous question. After company earnings grew only 2% in 2012 or well below the 31% combined earnings growth in 2010 and 2011, the answer may be shorter than the franchise might admit.

Burger King Chief Financial Officer Daniel Schwartz also recently admitted the company endured a challenging first quarter. However, he maintained that the franchise continues to look to add premium items to its menu. That proved particularly evident as the brand's latest seasonal promotional items included the veggie burger, stuffed beef patty and pina callada smoothie. All of which cost well over $1 and are currently only being combated by the lowering of the price of the brand's Whopper Jr.

Of course, Burger King's drive to add premium items goes far beyond profit and into another obstacle facing the fast food industry. That being the growing pressure to eat healthier.

The healthcare law's requirement that chains list nutritional info on all their items has led to some intriguing, if not unnerving, discoveries. An Angus Bacon and Cheese from McDonald's, for instance, contains 1,990 mg of sodium or almost one's entire recommended daily intake.

Now the turn towards health has proven quite profitable. As an example, Whole Foods (NASDAQ:WFM) currently enjoys a market cap of $15.4 billion. However, it would be wise to question whether fast food restaurants could ever appease customers via healthy options, sspecially if that included the then necessary price increases.

Even if they could, such a development would require a large scale overhaul of these companies' business models while leading them into unfamiliar terrain. Overall, a development that may turn away investors while further alienating remaining customers.

Such a transition would also leave these chains in an uphill battle with established fast casual brands such as Panera Bread (NASDAQ:PNRA) and Chipotle Mexican Grill (CMG), both of which enjoyed over 25% earnings growth in 2012.

Between the healthcare law's nutritional listing requirement, rising food prices and the consumer demands for cheap food, these companies are left with a situation in which they will almost certainly lose at least some customers as a result of their next move. With Burger King, McDonald's and Wendy's all within 8% of their 52-week highs and McDonald's back challenging its all-time high, the time to take profits has therefore arguably arrived.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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