This was published 12 years ago
Health kick pays off for fast-food chains as they supersize earnings
The big players have moved nimbly to confront the obesity scare.
By Michael Evans
IN THE the face of an obesity epidemic, Australia's fast-food eating habits have undergone a fundamental shift over the past decade that has proven a direct challenge to profits of the big chains.
Once dominated by hamburgers and fries, the fast-food industry has undergone a health kick. Salad bars, juice chains and sushi shops have increased competition in an already saturated market.
Subway has surreptitiously surpassed McDonald's.Credit: Nic Walker
A BusinessDay examination of official accounts shows the big players have proved remarkably nimble. Industry experts say they have tapped in to the awareness of health-conscious eating to reinvigorate their businesses while taking advantage of the economic downturn to squeeze independent players.
Accounts for the corporate entities behind chains such as McDonald's, Pizza Hut, KFC and Hungry Jack's show healthy sales growth over recent years. McDonald's Australia has almost doubled its profits in the past 10 years.
''We are concerned about our health but we are not going to be concerned right now because we're concerned about our living, and where our dollars are going to come from,'' says Sissel Rosengren, the author of a fast-food industry report for consultancy BIS Shrapnel.
As Rosengren argues, while consumers might claim to want to eat more healthily, the reality is very different when we find ourselves at the counter craving comfort food. Indeed, Australians love fast food and are eating more of it. A decade ago we ate the occasional burger and fries less than once a week. Now we tuck in weekly. We spend on average more than $38 a week on the stuff, up slightly since 2008.
Fast food has become a $16 billion-plus a year industry in Australia. It grew by $3 billion in the past five years alone. But our affair with fast food and its high fat and salt content has been blamed for Australia becoming one of the fattest countries on earth.
The large established players with their huge slices of the market had plenty to lose when the national debate on obesity began.
Australia's fast-food market is dominated by a handful of big chains with an enormous footprint. More than 16,000 fast-food stores dot the Australian landscape, split almost down the middle between chains and independent fast-food stores from local chicken shops to Chinese restaurants.
Consultancy IBISWorld estimates McDonald's has 20 per cent of the market, Yum! Restaurants, which controls Pizza Hut and KFC, has 17 per cent, Hungry Jack's (Competitive Foods Australia) 8 per cent, Domino's Pizza 5 per cent and Quick Service Restaurants' Red Rooster, Chicken Treat and Oporto chains have 3 per cent.
The BIS Shrapnel analysis shows that McDonald's is far and away the biggest by spend, at 14 per cent - more than double KFC. And by visit, McDonald's is 15 per cent, again more than double nearest competitor KFC.
''Go back six or seven years, and McDonald's was at the crossroads, staring at 'what are we going to be?''' Rosengren says. ''If you think about it, McDonald's and those international fast-food chains hadn't changed their concept since their inception in the '50s and '60s.''
So, how have the traditional burger, pizza and chicken barns been able to grow? The dominance of chains and their buying power and marketing expense give them an advantage over independent restaurants. They have learnt to become nimble, Rosengren says. In fact, the big fast-food players have used their market position to reinvent their offers.
Perhaps more importantly, the ''influx of healthy food options'' is driving industry growth, says IBISWorld's Suzannah Rowley, author of a second report on the industry.
As the two reports show, big shifts are occurring in the fast-food market. Among them:
■Subway, a chain of sandwich bars, now has more stores (about 1100) in Australia than McDonald's.
■Coffee is the largest fast-food category, with 12 per cent of market, twice the size of next largest, hot potato chips.
■Munching on that muffin while you wait for your caffeine hit has seen the doughy treat become the fastest-growing category.
■And if your local sushi bar looks a bit busier than it was a few years ago, it's no surprise. Healthy noodle and sushi categories are booming.
The combination of health consciousness and the downturn have been drivers in the industry over the past five years. The likes of narrow product offerings such as doughnut chain Krispy Kreme fell into administration.
McDonald's Australia's profit has grown steadily over the past decade, defying the turn in sentiment against fast food. (McDonald's Australia's profits are only for the corporate entity and the restaurants it owns. The results don't capture franchise operations it doesn't own.)
In less than a decade, McDonald's Australia's normalised net profit has nearly doubled. Its profits have grown from about $110 million in 2004 to $188.5 million for calendar 2010. Total sales are estimated at $3 billion.
''I'm not surprised at all they are making those profits,'' says Rosengren. ''If you look at the process they've gone through over the past seven years, there's been a lot of soul searching, thinking about how to attract new customers.''
Ray David, an analyst at UBS, prepared a detailed industry report for the public float of Collins Food, which controls Queensland KFC stores and the Sizzler chain, in which he wrote: ''McDonald's leads the way in healthier options.
''McDonald's turnaround … was underpinned by the introduction of healthier sandwiches, premium food menu items and lower-cholesterol options. According to McDonald's, while healthy food options are not a significant proportion of sales, customer traffic and sales of its burgers have increased on the back of renewed customer traffic.
''McDonald's introduction of gourmet wraps and sandwiches in 2008 saw market share losses reverse following three years of decline in 2006-08.''
Ironically, its recent profit lift has come since the introduction of a premium menu range, not the health range. ''In 2009-10, the most significant development … was the launch of the premium Angus burgers by McDonald's and Hungry Jack's in 2009. The Angus Burger drove notable increases in market share for both of these chains,'' David wrote.
Fast-food customers, half of whom are aged under 24, according to IBISWorld, may like to think about eating healthily but don't always put it into practice.
Remarking on a key trend, BIS Shrapnel's Rosengren says: ''If you ask consumers what they're looking for … and then ask operators what customers are asking for, there's a large discrepancy between what they say they want and what they actually ask for when it comes to the situation.''
Fast-food operators have been forced to add healthier options to their menus. Domino's, for example, is switching to a cheese with less fat. One of the reasons has been the aggressive growth of sandwich chain Subway.
Subway now has the most stores (at least 1100), more than McDonald's, even though they get fewer customers. Analysts disagree about Subway's appeal, split between health and the ''sandwichification'' of city workers. Either way, Subway is seen as driving menu innovation, analysts say.
''The advent of Subway has also driven a change in fast-food menus, most notably with McDonald's and KFC, which have responded by introducing healthier menu options,'' says David from UBS. ''Subway's growth has predominantly been driven by an increase in health awareness and greater demand for lower-cholesterol meals.''
BIS Shrapnel argues Subway is building itself up on the city workers wanting a quick and light lunch.
A part of menu innovation has been the morphing of outlets into ''impulse'' operations with coffee and cafe style drinks and snacks the key driver. Hungry Jack's recently reported that coffee sales now accounted for 5 per cent of revenue, up from virtually zero just a few years ago.
BIS Shrapnel reports coffee is the biggest single fast-food item. Complementary sales has seen muffins the fastest growing category. KFC, once known as Kentucky Fried Chicken until the emphasis on fried was removed, is after the cafe drinks segment too, launching a drink known as Krushers in 2009.
KFC is operated by different companies in different parts of Australia.
Yum! Restaurants Australia is a subsidiary of the listed Yum! in the US. IBISWorld calculates that Yum! Australia's sales have grown from about $450 million in 2004 to $550 million in 2009. Recent conditions seem to have been tough. Regulatory filings in the US show Australian KFC operations were ''weak'' in the first quarter of 2011 but picked up in the second.
Growth in fast-food retailing is expected to outpace total food sales in real terms over the next three years.
Consumers tend to trade down rather than stop going out to eat altogether.
''What you see in an economic downturn is hamburgers became popular again,'' says Rosengren. ''We put it down to the fact it's a comfort food - that's what does happen during an economic downturn, comfort food comes back in - it's about the whole mental state of the nation.''
Fast-food chains were a key winner in the downturn. We no longer go out just for birthdays or celebrations.
''When we have an economic downturn, people still want to go out and continue that part of their life. But they haven't been going out as often and spending as much each time; they trade down,'' says Rosengren.