Changing Dietary Fashions: Why Fast Food Chains Fail

Changing dietary fashions are being discussed whenever talk turns to why fast food chains fail. CNBC is currently running a copyrighted article about the financial woes of Chipotle Mexican Grill, which just lost 10% of its share price in one day, falling to a current low in mid-day trading of just $272.10 per share, down from an all-time high of $749.12 in August of 2015.

Chipotle’s woes began in October of 2015 with stories about the first in a number of incidents involving food borne illnesses that were tracked back to Chipotle stores, which follow a practice of using locally sourced ingredients whenever possible. It turns out that relying on locally sourced ingredients doesn’t enable a far-flung fast food chain to maintain adequate quality control. Using locally sourced “fresh – never frozen” meat ingredients sounds ecological, but it is often a back door through which food borne illnesses can slip through.

Facing continuing declines in foot traffic, Chipotle has raised sticker prices by five to seven percent to offset the loss of sales revenue, after attempting to hold the line against inflation for the past few years without raising prices or decreasing portion sizes. As part of its efforts to remain hip, Chipotle also pays workers substantially more than the current federal minimum wage, but not enough to be a real wage leader, so the company absorbs the cost of higher wages without getting the public relations benefit.

Chipotle’s public relations problems are substantial. In addition to the food borne illnesses, Chipotle followed a “no advertising” policy for several years before succumbing to the popular wisdom that no one beats a path to your door if they don’t know you’re there. Unfortunately, their recent campaigns have been aimed at convincing the public that Chipotle’s food is safe….which is a bad way to attract customers. Saying, “We won’t make you sick again,” is not a good way to influence customers.

What’s Wrong with the Fast Food Business?

In some respects, Chipotle is caught in the same trap that many other restaurant chains and independent operations are prey to: in order to justify price points that will generate a profit, many restaurateurs put more food on their plates than the customers either want or need, contributing to the national obesity problem without solving the price point equation.

Some restaurateurs attempt to tweak their formula by using smaller plates at the same price, changing the profit price point. Others offer smaller servings at smaller prices, knowing that they will make nothing on the smaller plates and hoping consumers will be tempted into buying the full-sized dinners once they get to the table.

While Chipotle is an extreme case with special circumstances, there a number of fast food and economy dining establishments that are suffering from a change in customer shopping habits.

Because more and more customers are shopping online, the foot traffic in the nation’s malls has been decreasing steadily, along with the profits generated by the restaurant chain outlets located in those malls. By the same token, because customers are not going out to shop as frequently, even when their destinations are strip malls and local shopping centers, they are less likely to stop at a freestanding chain outlet for a full meal.

There are really two categories of fast food: order at the counter establishments, which are the true fast food joints, and the “order from your table restaurants,” which are the informal dining establishments…but both types of establishments are suffering decreasing patronage.

So, how can the some of the same companies be on both lists?

There’s a long list of fast food and informal dining destinations that are thought to be in trouble. The list varies from month to month, but it includes such mainstays at Sbarro’s, Olive Garden, Applebee’s, Friday’s, Chili’s, Red Lobster, Buffalo Wild Wings (no great loss there), Ruby Tuesday (a personal favorite), and Romano’s Macaroni Grill, not to mention fast food options such as McDonald’s, Wendy’s, and Dunkin’ Donuts.

That list comes from Culture Cheat Sheet, which makes a business of putting together “best of” and “worst of” posts for the internet. On the other hand, there’s Business Insider‘s list of of the most successful fast-food chains in America, which includes Chipotle at number 14, Dunkin’ Donuts at number seven, Wendy’s at number four, and McDonald’s at number one.

It’s really pretty simple. The Culture Cheat Sheet article is reporting on downward trends in sales. The Business Insider list is based on annual gross sales. The Business Insider article tells us how these chains are doing right now. The Cheat Sheet article suggests how well the companies on their list are going to do in the future. As the old saying goes, past performance is not a good indicator for future prospects.

But What’s the Real Problem with Fast Food and Informal Dining?

As a business, the restaurant industry has four serious problems:

People are bored with fast food fare: Chain operations cannot allow variable menus, nor can they change menu options that frequently because such changes cost millions of dollars in advertising, public relations, signage, and food preparation strategies. As a result, aside from the occasion “limited time offers” shoppers get to pick from the same list of choice and hence become bored with the experience.

Quality: There isn’t a chain operation on the planet that can compete against a locally owned and operated pizzeria when it comes to delivering a quality pie, nor can they deliver anything like the pizzeria ambiance, which contributes significantly to the overall experience. With the exception of Sbarro’s, which is currently in bankruptcy for the third time, virtually no pizza chain offers anything other than pizza and calzones. At a local Italian eatery, you have a full range of dining options.

Arby’s, which came back from the brink of extinction a few years ago, offers a surprisingly satisfying range of meals at reasonable prices, but the chain often ranks dead last in consumer preference surveys. Taco Bell also suffers from a bad rep, but it is possible for a family of four to eat decently there for under $15. Neither chain offers anything close to the real thing. I don’t know what that stuff is that Arby’s serves as roast beef, but it never came from any butcher shop I’ve ever been in, and the Mexican food at Taco Bell is a faint echo of the Mexican food I’ve eaten in Mexico, but they both live up to their reputation as value meals.

The Meat Issue: More and more Americans want less and less meat in their diets and, when they eat meat, they want higher quality meat. Higher quality meats mean higher price points. And then there’s the increasing cost of seafood, which makes fish a less affordable option for many diners.

The Carb Problem: More and more evidence is piling up that carbohydrates are the main culprits in many food-based illnesses, not fat, as was previously thought. Carbs are broken down into sugars and sugar causes everything from Diabetes to Alzheimer’s. Therefore, in addition to wanting less but better meat, diners are turning away from high carb meals….but high carb meals are a mainstay of the restaurant industry because they are cheap to prepare, and don’t go bad as quickly as meats, fruits and vegetables.

The Ideal Restaurant Chain for the 21st Century

If you want to live longer, and live better while living longer, you might be well advised to embrace a diet that includes less meat and fewer carbs and turn, instead, to a low meat, high vegetable, high fruit diet. When you start searching for such a cuisine, your search usually ends up at your local oriental restaurant, or it would if they didn’t put rice, noodles or corn starch into almost everything they serve. (The Japanese don’t use corn starch.)

After Oriental cuisines, your next port of call would probably be Middle Eastern cuisines: Greek, Turkish, Persian Lebanese, Palestinian or Israeli (which are practically interchangeable.) Your third and final option would be Indian and Pakistani.

All of these cuisines rely heavily on rice and beans. They use meat more as a flavoring than as a mainstay and, because they are less familiar cuisines, they are more interesting to the palette. Cheaper ingredients, a pitch for healthy food rather than fashionable food, and new flavors and textures. What could go wrong?

These options have another common element. With the exception of the Oriental options, no one has ever launched a successful chain operation for Middle Eastern or Indian style cuisines….and that’s food for thought for a budding restaurateur looking for a new idea.