The Recession: Impact on Fast Food Restaurants and Sales of Frozen Potato Products to Foodservice

A year ago I wrote in a PotatoPro Newsletter on the impact of a recession on the potato processing industry. I presented three cases that might be predictive how challenging times would affect the fast food sector, the frozen food industry and snack sector.

At that time there we were still hopeful that the hypothetical case of a recession would not be tested, but now we know we are not that lucky. A year ago, I predicted that the potato industry would be reasonably recession resilient. Much has happened since, so it is time to see if that position still holds.

When I started to write on this topic, it soon became clear there is more to share than what I want to squeeze in one newsletter. Therefore, we will address this topic in a PotatoPro newsletter first: a sequel!

Today, we will address (1) the fast food industry, while over the coming weeks we will cover (2) frozen retail products (including food prices in general), (3) potato prices and (4) snack foods. 

The fast food sector
 

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  McDonald's

• 

  KFC

• 

  Burger King

McDonald's

McDonald's, world's largest QSR chain, reported over 2008 an increase in global comparable sales of 6.9%, with in the fourth quarter a global comparable sales increase of 7.2%.

A good indicator of how well McDonald's did in 2008 is the fact that McDonald's was one of only two companies in the Dow Jones Index posting gains on the New York Stock exchange over 2008 (4.5%). The other company was Walmart.

And McDonald's is still going strong: For January 2009 McDonalds reported a 7.1% same store sales increase.

Yum Brands! (KFC)

Yum! Brands reports a worldwide system-sales growth of 7% for 2008 and 6% for the fourth Quarter. Same store sales were up 3%, both for the year and Q4. However, according to Chairman and CEO David Novak, KFC was underperforming, with extremely poor sales in January 2009.

Burger King

And Burger King just added its 20th consecutive quarter of positive global comparable sales, up 2.9% (Quarter ending December 31)

Growing revenues in the restaurant chains not necessarily mean more consumption of potato products. Just think of trends like replacing the french fries in value meals with healthier - but for restaurants more expensive - options. Or the focus of some chains on - high end - coffee, causing havoc for Starbucks.

So what is happening to the sales of potato products to the QSR chains?

Tracking data of the sales of frozen potato products to foodservice by the major US potato processors indicates a low single digit drop in pounds sold in the last quarter of 2008 and a high single digit dollar value increase.

For entire 2008, the volume sold is flat. Export of frozen potato products is up, both in volume and dollar value, but export is relatively small (about 15%) compared to total sales. There is no clear sign in these tracking data that foodservice is moving away from higher priced specialties.

A drop in (volume) sales is consistent with remarks by Mark Hayden of Conagra/Lamb Weston at the Potato Expo early January that foodservice sales of frozen potato products in the fall were weak. His remark that sales in December 2008 "were awful across all channels" adds further insight in the market development. 

Also in the Netherlands, John Wiskerke of Lamb Weston Meijer referred to the consumer saving on expenses at foodservice restaurants during a presentation for farmers.
 

Looking at published volumes of potato products produced in the Netherlands, the December production is just slightly below the range of production volumes in previous 4 years. Production volume from the harvest up to December still ranks 3rd out of the last 5 years. The situation looks even better when based on the use of potatoes.

So what is the attitude of consumers towards restaurant visits?

Research Group Morpace asked 1010 consumers in the US for their attitude towards restaurant visits early this year. Fourty-eight percent of the consumers indicate they are eating out less often now than six months ago. This is up from September 2008, when about a third of the respondents indicated they had reduced restaurant dining. QSR chains benefit from consumers trading down, but the Morpace research indicate that still 33% of the consumers are eating less often at Fast Food chains.

How are the QSR Chains dealing with this situation?

In Japan during the nineties, McDonald's added new restaurants and lowered prices. And although in Japan in the nineties the turnover per restaurant declined, overall turnover increased.

McDonald's may use a similar approach during the current global downturn: McDonald's recently announced the opening of another 1000 restaurants.

And as far as lowering prices: McDonald's cut prices in China up to 33%.

KFC is looking at lower prices too: the chain that never had a value meal in the US, introduced a value meal last week. KFC has expansion plans as well. E.g. next to their continued impressive expansion in China, they plan to add 200-300 new restaurants in the UK in the next 3-5 years.

If consumers eat more at home, will they buy more frozen potato products for consumption at home? We will look at that next week!