Los Angeles, Oct. 20 - Yum Brands Inc's Taco Bell chain expects the U.S. restaurant price wars to heat up as the industry navigates its toughest operating environment in two decades, a top marketing executive told Reuters.
The Mexican-theme fast-food chain reclaimed its value roots in May, when it introduced the "Why Pay More" menu with items priced at 79, 89 and 99 cents.
The menu accounts for about 15 percent of the chain's U.S. sales and customers who order from it tend to spend more per visit, said Chief Marketing Officer David Ovens.
"The economic circumstances have been to our advantage," Ovens said in an interview. "We certainly expect the price wars and the aggressive value plays to heat up."
Fast-food chains from McDonald's to Wendy's/Arby's Group have rolled out value menu items and while other types of restaurants offer reduced-price meals, special promotions and smaller portions to coax money from the wallets of cash-strapped consumers.
Earlier this year, a commodity price spike threatened to take such value plays off the table by threatening operators' ability to offer low-price food at a profit.
One potential silver lining to a global economic slowdown is that it has already helped reduce prices for some key ingredients and many analysts are expecting costs to come down for the remainder of the year.
That's expected to help companies along the food chain.
Meanwhile, Yum executives said earlier this month that Taco Bell's "Why Pay More" menu, which was designed to drive traffic and sales, had exceeded expectations.
Sales at the company's established and owned restaurants in the U.S. rose 4 percent in the latest quarter as Taco Bell and Pizza Hut delivered solid results. Those sales were partially offset by a 4 percent decline at struggling sibling KFC, which lacks a full selection of value-priced options.
It was a shot of good news from Yum, whose domestic operations have lagged its international performance. For its part, Taco Bell has been working to overcome a 2007 U.S. food safety scare.
HIGH-LOW COMBO
Rivals like McDonald's, which has outperformed most other restaurants, has also used its "Dollar Menu" to drive results. Wendy's/Arby's, the third-largest fast-food company, has begun feeding customers a steady diet of value menu items.
One way fast-food chains make value menus work is by also promoting premium-priced items with higher profit margins.
For its part, Taco Bell is offering a $3.99 Triple Steak Burrito -- a record high burrito price for the fast-food chain. Ovens describes the company's new high-margin Frutista Freeze drink that sells for less than $2 "as the goose that lays the golden eggs."
That high-low approach is something of a departure for the Irvine, California-based company that in the early 1990s did not have a single menu item priced higher than 99 cents.
Ovens said the "Why Pay More" menu will change over time, with some items being deleted or shifted to the standard menu.
Meanwhile, he expects strong demand for lower-priced meal options to insulate fast-food companies in a tough economy.
"If you are worried about your financial situation, the transaction that costs you five bucks is not as significant as the one that costs you 10 or 30," he said.