Fast-food competition bites

Fast-food operators have an American dream. They calculate that if the fast-food markets in overseas countries develop along US lines, the French sector will grow ten times and the Italian by 100 times.

But a new report by Corporate Intelligence called “Fast-food in Europe” casts doubt on these over-optimistic forecasts. “Such forecasts should be taken with a pinch of salt. They take for granted shifts in cultural, social and economic structures, which in practice take place only over long periods of time and which might go in other directions. Over-optimistic expansion plans have often had to be scaled down,” the report says.

For leading fast-food operators such as McDonald’s and Burger King, the US market is approaching saturation, and they are experiencing a downturn in margins as increasing price competition bites.

This means their performance in overseas markets is becoming more important, if the companies are to continue growing. But already there are signs that similar saturation is being reached in their leading European market, the UK. This means growing price competition, and the unappetising prospect of sales volumes growing while prices stay the same.

Financial results in the US for last year were disappointing. McDonald’s reported same-store sales down for the sixth consecutive quarter in the fourth quarter of 1996. The smaller Wendy’s and Burger King did somewhat better, though Wendy’s margins were also under pressure.

The report predicts fast-food turnover will grow fastest in places with high populations of young people, like Greece, Portugal, Ireland and Spain. But cultural differences mean that fast-food operators are in for a long-haul battle in these countries.

Fast-food prices in many European countries are still high, but as competition grows, the industry can no longer expect fast-food prices to rise faster than grocery prices. Margins are likely to suffer.

But there is still growth to come, and Corporate Intelligence forecasts that it will be greater in fast food than for other consumer sectors.

In the UK, 1997 will be a good year for the fast-food operators, says the report. But it casts doubt on performance for the two years after this.

There has been a long-term trend for more money to be spent on food outside the home, and this trend is likely to be re-established.

The strength of consumer spending in the UK, coupled with the windfall gains to savers and home-owners, make the immediate prospects for 1997 look very promising, particularly since the BSE crisis held back spending in 1996.

However, there is a growing question over whether the current prosperity can be sustained to the end of the century, in view of the fiscal situation of the government and the economic uncertainty in the rest of Europe, which will inevitably affect Britain.

UK fast-food sales are forecast to expand by about 12 per cent in volume terms up to the year 2000, at an average rate of 2.2 per cent a year (considerably faster than in 1991 to 1995), to a total of 6.5bn a year at 1995 prices. But as price competition becomes more intense, prices will probably not grow much higher.

The systemised fast-food sector (outlets like McDonald’s and Burger King where purchase is very regimented) is expected to eat into the non-systemised sector even more quickly.

Continued growth of seven per cent a year in real terms would raise the systemised sector’s sales from 3bn to 4.2bn, and its share of the total market from 52 per cent in 1995 to 65 per cent by the end of the century.

Growth is much more likely to come from increased frequency of visits from those people who already eat fast-food than from a further widening of the customer base: the number of people purchasing some form of takeaway food is already close to 100 per cent for under-30s and about two-thirds of the whole population – it is close to saturation.

This increased frequency will be achieved to a large extent by the opening of new types of outlets. The fast-food market in Britain’s high streets is saturated, but recent developments suggest that the potential for the established fast-food groups to move on to new types of locations, such as petrol forecourts, shopping centres and leisure facilities, is substantial.

This trend may especially benefit PepsiCo, as it has many formats, including Pizza Hut, Taco Bell and KFC. The fast-food interests are to be spun off into a separate company, and PepsiCo is selling off minor brands in dining, sandwiches and hamburgers to concentrate on the three big brands.

Fast-food operators may well need to introduce more variety into their menus, or to work in collaboration with each other, in order to cash in on many of these opportunities. Otherwise, they could be snapped up by non-fast-food operators, which, with their broader menus, will have a steadier appeal to what are, to a large extent, captive clienteles. Developing new products is crucial for fast-food operators.

As in other countries, the ageing of the population will pose a challenge for the youth-oriented fast- food industry, which will want to retain its customers as they grow older, and attract older customers. However, in the UK, the number of children will also grow, by some five per cent over the next five years (not teenagers, whose numbers will decline sharply), so that chains oriented towards family eating may do well. Longer-term forecasts suggest the number of children will stabilise in the next decade, while the number of teenagers will increase slightly.

The multinationals are used to playing a waiting game, particularly McDonald’s, when it comes to international expansion. The company made a loss on its operation in the Netherlands for 20 years before it saw any profits. It has yet to make profits in Spain and Belgium.

Such a long-term approach requires a good deal of confidence that the consumers in these countries will eventually flock to fast-food outlets and away from traditional quick-serve restaurants in their countries.

As key markets such as the US and UK reach saturation, the new markets will be ever-more crucial to growth for the multinationals. Their dreams of a US-style presence for fast-food outlets may never come true, but there is still potential for limited growth in new markets.