Fear of fat eats up fast food profits

By IRENE CHAAPPLE

When Restaurant Brands shares plummeted after a $2 million profit downgrade this month, eight employees of a prominent merchant bank conducted a snap poll.

Restaurant Brands' KFC had shouldered the blame for the downgrade and it was time for some serious analysis.

Who, the group asked, eats KFC fried chicken?

Ummm, said one broker. Me? She enjoyed it at least once a fortnight, if not once a week. But others said they ate it maybe once every six months, or once a year.

Our broker was mortified. "I would never have thought my diet was particularly bad," she wailed to the Herald later, on condition of anonymity.

"I guess because it's greasy and not good for you," she chuckles in embarrassment. "I felt like a second-class citizen."

Both she and her husband work, she explained. They have little time to cook and the takeaways are easier. And she likes fried chicken.

But, she admits, Subway is increasingly becoming her takeaway of choice. "I guess we give more thought to Subway ... directly because of [the health issues]."

And so there it is: health - the thorn in the side of fast-food outlets around the world.

Whether by virtue of perception or reality, brands such as KFC and McDonald's are being pummelled by consumers choosing health-conscious brands such as Subway.

It's a war out there and traditional fast foods have been losing.

A "fat tax" advocated by anti-obesity groups is gaining support: Yesterday an NBR-Philips Fox poll showed 40 per cent of New Zealanders believed high-fat fast food should be taxed.

In the United States, a case taken against McDonald's by a group of obese consumers was thrown out, but more litigation is expected.

The fast-food brands' struggle to win back customers is being waged largely through marketing campaigns touting low-fat menu additions such as salads.

Vicki Salmon, acting chief executive of Restaurant Brands - which also operates the Pizza Hut and Starbucks franchises - is dismissive of claims the fast-food brands are making people fat.

"[KFC] is not making lots of people obese. Obesity comes from lifestyle ... it's about a whole collective amount of things that are happening in the marketplace and fast food just sits on the edge of that."

She calls KFC a "fantastic product" because it is high in protein. Yes, she agrees, some new products are needed to revitalise the brand, but this month's downgrade - which cut the expected half-year result by a third and knocked the parent company's shareprice down to just over $1 - is not an indication the fried chicken brand is washed up.

Despite Salmon's protestations, chains like KFC face major challenges as consumers' attitudes change and alternatives sprout.

Tim Morris, principal of market research consultancy Coriolis Research, believes the issue is not so much obesity as the proliferation of takeaway options.

"Globally there is a trend towards healthy fast foods. In New Zealand there is the success of local brands such as Burger Fuel."

Perhaps the greatest beneficiary of this change in attitude is sandwich chain Subway.

The franchise began here in 1995, but almost half its 92 stores opened in the past year.

This week a new sandwich chain, Zero's, opened its second store in Ponsonby and Quiznos, a large global chain, is expected to arrive soon.

Ryan Dawkins, former owner of the Dispensary Bar, chipped in with three other shareholders to bring New Zealand its second sub sandwich chain in Zero's.

In America, Dawkins explains, sub sandwiches are a category in themselves.

In New Zealand the market only knows Subway and Dawkins believes the entry of Zero's will widen the sub market. The company will have three stores open by February next year and then intends to sell franchises.

Like Subway, Zero's will market itself directly to the health-conscious.

Dawkins says Zero's has several types of sub containing just 5 grams of fat. The advertising hasn't started yet, but the health card is sure to be played in a big way.

In its advertising, Subway brags about its 6g-fat subs. The most recent clip features a man dining at an opulent restaurant. He can eat here, the ad goes on to explain, because he had Subway for lunch.

Subway struggled during its early years in New Zealand but now sales are "very good", says Mark Rutherglen, the co-founder of the New Zealand franchise.

He won't be drawn on figures, but when asked if the chain was knocking on KFC's door, said: "Definitely."

KFC - formerly Kentucky Fried Chicken - has tried to embrace the revolution but had an early hiccup in the United States.

Ads which implied its foods would help consumers eat better and lose weight were investigated by the Federal Trade Commission.

The Wall Street Journal reported the commission sent a civil subpoena asking the chain to explain and justify the health claims in the ads. KFC ended the promotion.

In New Zealand, a smaller but similar kerfuffle erupted over McDonald's ads featuring Olympic cyclist Sarah Ulmer. A complainant to the Advertising Standards Complaints Board believed the ads - in which Ulmer promotes chicken burgers, salads and cheeseburgers - misled viewers.

The complaint was not upheld. The board found the ads were produced with "a due sense of social responsibility".

McDonald's marketing manager Ian Sutcliffe says the company is simply a tall poppy for uninformed consumers to attack.

He says Ulmer approached the chain because she had watched its move to more nutritional food and wanted to help. "She ain't doing it for the money," he said.

At a symposium on child obesity last month executives for KFC, McDonald's and Coca-Cola fronted to say they believed they were scapegoats for the problem.

But whether that's true is almost an aside. Customers are clearly voting with their feet, and a perception that the chains' food is unhealthy is a powerful force. Over the last two years McDonald's suffered. Then, says Sutcliffe, "it was like a light went on".

Salads were introduced along with healthy products. New Zealand McDonald's customers can expect muesli in the new year.

Advertisements such as the one featuring Ulmer were introduced and customers' perceptions of the brand were shifted. The share price has shown a dramatic recovery.

KFC is promoting its chicken sub product.

Meanwhile, sub sandwich stores are popping up like mushrooms. Says Morris: "At a more fundamental level, people are still eating [KFC and McDonald's products] ... but I just don't think they really want any more."